IRS Rejects 20K Employee Retention Credit Claims

The Internal Revenue Service is taking a new step as it works to combat dubious Employee Retention Credit claims. 

The IRS implemented the tax relief program during the early months of the COVID-19 pandemic.

It was designed to help businesses that continued paying employees if they were either fully or partially suspended due to a government order.

However, the IRS said third parties used the program to aggressively targeted small businesses with questionable schemes. 

Disallowance Letters

The agency is sending an initial round of 20,000 letters disallowing claims to entities that either didn’t exist, or didn’t have paid employees during the eligibility period.

The ERC eligibility period was between March 13, 2020 and Dec. 31, 2021. 

Entities established after that date are not entitled to the program.

“It’s not surprising that we’re seeing claims that clearly fall outside of the legal requirements,”

IRS’s Danny Werfel

“With the aggressive marketing we saw with this credit, it’s not surprising that we’re seeing claims that clearly fall outside of the legal requirements,” said IRS commissioner Danny Werfel. 

Werfel said the letters are part of an initial set of steps to deal with the issue.

In September, the IRS announced that it was suspending new ERC claims through at least the end of 2023.

Ineligible Claims

IRS officials said the disallowance letters that identify ineligible claims help taxpayers and the tax administration by:

• Helping ineligible taxpayers avoid audits, repayment, penalties and interest
• Protecting taxpayers by preventing an incorrect refund from going to an ERC promoter
• Saving IRS resources by disallowing incorrect credits before they enter the audit process

Officials will announce a special voluntary disclosure program involving ERC claims in December.

“More letters will be going out in the near future.”

Werfel

The IRS is also accepting requests to withdraw claims from those who may have filed an inaccurate tax return through the end of the year.

The IRS said it will treat withdrawn claims as if they were never filed, with no penalties or interest imposed.

“More letters will be going out in the near future, including both disallowance letters and letters seeking the return of funds erroneously claimed and received,” Werfel said.

Audits and Investigations

In July, the IRS began reviewing claims and intensifying audits and criminal investigations on promoters and businesses submitting dubious claims. 

Officials are working on hundreds of criminal cases, and thousands of ERC claims have been referred for audit. 

“As we continue our audit and criminal investigation work involving the Employee Retention Credits, we continue to urge people who submitted a claim to review the rules with a trusted tax professional,” said Werfel.

The IRS continues to warn taxpayers to use extreme caution before applying for the ERC due to aggressive measures by scammers.

“If they filed an inaccurate claim, we urge them to consider withdrawing their pending claim or use the upcoming disclosure program to repay improper refunds to avoid future action.”

The IRS continues to warn taxpayers to use extreme caution before applying for the ERC due to aggressive measures by scammers and marketers. 

IRS officials previously shared a list of warning signs for employers about ERC promotions:

• Unsolicited calls or advertisements mentioning an “easy application process”
• Statements that the promoter or company can determine ERC eligibility within minutes
• Large upfront fees to claim the credit
• Fees based on a percentage of the ERC refund amount 
• Aggressive claims from the promoter that the business receiving the solicitation qualifies before any discussion of the group’s tax situation

They have set up an interactive tool and an FAQ page to help people understand eligibility.