IRS Disallows Thousands of ERC Claims

Published: Sep 25, 2024
By: Miri Forster
Topics: Tax

Employee Retention Credit

Coronavirus
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The IRS has sent out thousands of letters disallowing claims for the Employee Retention Credit (“ERC”). These letters, called LTR 105C, explain the disallowance is based on a review of IRS records that indicates the employer is not an eligible employer under the CARES Act. While not all the letters properly describe available next steps, taxpayers that receive IRS LTR 105C have only 30 days to appeal the disallowance to the Independent Office of Appeals.

The ERC disallowance letters are in addition to thousands of IRS audits that are already underway.

Who Is Entitled to the Employee Retention Credit?

The ERC is a COVID-era program created to incentivize employers to keep their employees on payroll. Generally, eligible employers are those that:

Experienced a full or partial suspension of operations due to a government order related to COVID-19 during 2020 or the first three quarters of 2021;
Experienced a significant decline in gross receipts during 2020 or the first three quarters of 2021 as compared to the same periods in 2019; or
Qualified as a recovery startup business for the third or fourth quarters of 2021.

The IRS has been warning taxpayers for months to check their eligibility for ERC claims, offering checklists and encouraging taxpayers to check with an experienced professional regarding whether their claim qualifies for the credit. The IRS has indicated that it believes these disallowances are ultimately in the taxpayer’s best interest, as an erroneous claim that is paid out may result in audits and penalties and interest for the taxpayer.

Available Programs

The IRS has introduced different programs allowing taxpayers to withdraw or repay erroneous ERC claims over the past year. The IRS currently has a Withdrawal Program available for claims for which refunds were not yet paid and which are determined to be ineligible for the credit.

The IRS previously announced a Voluntary Disclosure Program (“VDP”) for claims that were paid but which the employer subsequently determined were ineligible. Those employers were allowed to pay back 80% of the ERC refund received, without interest or imposition of penalties. The original Voluntary Disclosure Program closed on March 22, 2024. The IRS reopened this program on August 15, 2024, with slightly less favorable terms for taxpayers. Taxpayers will have until November 22, 2024, to take advantage of the second program.

Increased ERC Enforcement Activity

The IRS has increasingly focused on stopping fraudulent ERC claims before they are paid out. These letters are the latest enforcement action from the IRS regarding the ERC. The IRS previously sent out 20,000 initial disallowance letters in December of 2023.

In one of the largest moves, the IRS put a moratorium on processing new ERC claims on September 14, 2023. On August 9, 2024, the IRS announced that it will begin easing that moratorium for the simplest ERC claims. Additionally, the IRS has also increased its prosecution of unscrupulous ERC promotors. The IRS has continued to release updates on these enforcement actions as new actions are taken.

Future of the ERC

Legislation that would have retroactively ended the ability to claim the credit recently failed on a vote in the Senate. Accordingly, most business’s ability to claim the ERC will expire sometime in 2025 at the latest. The IRS has made it clear it will continue to scrutinize ERC claims and disallow any claims they believe may be erroneous.

Taxpayers should have documentation available to substantiate the eligibility of the ERC claims whether they are under IRS audit or have received a LTR 105C. Taxpayers who have received a LTR 105C have very little time to appeal the disallowance to the IRS. Impacted taxpayers should reach out to a trusted tax advisor for timely assistance.

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Miri Forster

Miri Forster, National Leader of the Tax Controversy & Dispute Resolution practice group, has over 20 years of experience providing tax dispute resolution services to public and private corporations, partnerships and high net worth individuals on a wide range of technical and procedural issues.

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