The IRS has announced that it will be sending out more than 20,000 rejection letters to taxpayers who wrongly claimed the employee retention credit (ERC). The tax agency has been cracking down on “dubious” filings related to this pandemic-era tax break, issuing disallowed claims letters to ineligible taxpayers.
The ERC was created to provide support to small businesses during the Covid-19 pandemic, offering thousands of dollars per eligible employee. However, the tax break has led to a surge of companies attempting to wrongly claim the credit. As a result, the IRS temporarily stopped processing new filings in September due to a “surge of questionable claims.”
IRS Commissioner Danny Werfel stated, “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.” As a result, the agency has begun sending out copies of Letter 105 C to notify ineligible taxpayers of their disallowed claims. Additionally, the IRS will unveil a “voluntary disclosure program” later this month for taxpayers who have wrongly claimed the credit.
The agency is rejecting filings from entities that did not exist or did not have paid employees during the eligibility period. Werfel emphasized that this initial set of steps is part of the IRS’s compliance work in this area, with more letters expected to be sent out in the near future. This includes both disallowance letters and letters seeking the return of funds erroneously claimed and received.
This announcement comes just two months after the IRS introduced a special withdrawal process for small businesses that wrongly claimed the credit, allowing them to avoid repayment, interest, and penalties.
The crackdown on wrongful ERC filings underscores the importance of accurate and eligible claims for tax breaks, especially during difficult economic times. The IRS’s efforts to ensure the proper use of these credits will continue to be a priority as the agency works to provide support to businesses in need.