Public Service Announcement – IRS Issues 20,000 Disallowance Letters on Employee Retention Credit Claims
Hot off the press! The IRS has announced that it is going to send out 20,000 disallowance letters. The IRS is letting certain employers know that they failed to meeting the basic elibility requirements for the ERC. For those of you at home, that is not good. It likely means that the taxpayer or the return preparer did not do their homework before submitting the claim. You can read the IRS News Release here.
IRS Provides Detail on Reasons for Denial
According to the IRS, there are two big reasons for the disallowance. First, entities that did not exist during the eligibility period cannot claim the ERC. Claims that were disallowed for entities not in existence during periods of eligibility mean the entity did not exist during period of March 13, 2020 through December 31, 2021. Entities established after that time period are not eligible.
Second, entities that did have paid employees during the eligibility period cannot claim the ERC. Only employers who paid qualified wages during the eligibility period can claim the ERC.
I think this is just sort of the initial review of the cases, the IRS is taking a look at low hanging fruit before digging deeper into more complicated cases. That leads me to believe that we should have another round of letters denying claims sometime in the early new year.
If you’re one of the 20,000 employers who receives a disallowance letter, all is not lost. You will be provided an opportunity to provide additional information or take an administrative appeal. So, you should have a chance to preserve your ERC claim if you can show you do indeed qualify.
If you don’t receive a disallowance letter, you are not out of the woods yet. The IRS also noted in the news release that it has started thousands of audits on filed claims. These audits are for more complicated cases where maybe basic eligibility requirements are met but there may be other problem areas the IRS is looking into.
IRS Also Provides Hope for Employers with Completed ERC Claims
The news release mentioned that the IRS is about to issue a new voluntary disclosure program. This should not be confused with the voluntary withdrawal process I have discussed previously. The withdrawal process is only for those employers with claims that have not yet been acted on or those claims where the refund check has not been cashed. I will wait for the details to come out before commenting on the disclosure program. I suspect it will be a good way to resolve any potentially fraudulent (on the part of the return preparer) or improper claims. A huge concern for employers with improper claims is how to resolve the issue without incurring huge penalties and interest charges (currently 7%).
A warning though, if you are one of the potential audits regarding your ERC claim, you may need to file for voluntary compliance before notified about the audit. After you are notified, you are generally not allowed to take advantage of any voluntary compliance program. The idea is to have you come in before the IRS has to act. Once the IRS agent is at your door, figuratively speaking, you are often out of luck.
Summary
Finally, the IRS did warn taxpayers that if you have filed a claim that you should consider talking to a trusted professional to review the ERC claim to make sure that it is proper. If you think your claim has issues then consider either a withdrawal or voluntary compliance. If you do find yourself with a disallowance letter, you should consider hiring a tax professional to go over the letter with you. You may have good grounds to appeal the IRS’ disallowance. Don’t wait to act though – IRS generally puts strict deadlines on filing any appeals.
Be careful out there. ERC Claims are a huge area of fraud right now and the IRS is actively pursuing companies and tax preparers. If you have an ERC claim, you should talk with your tax adviser or someone who handles ERC claims to make sure you are not at risk of an IRS audit (or worse IRS criminal prosecution).
James D. Wade, Esq.
Beacon Tax Advocates, LLC
57 Portland Road, Ste. 3
Kennebunk, ME 04043
207-502-7181
jwade@beacontaxadvocates.com
www.beacontaxadvocates.com