IRS Rejects More Than 20,000 ERC Claims

The Internal Revenue Service (IRS) is continuing its crack down on dubious claims for the employee retention credit (ERC), a refundable tax credit for certain businesses that paid employees during the COVID-19 pandemic.

On December 6, 2023, the IRS issued a press release announcing that it would be sending more than 20,000 letters to taxpayers notifying them of disallowed ERC claims, either because their entities did not exist during the ERC eligibility period or because they did not have employees during the eligibility period. The letters will allow taxpayers to contest the disallowances by providing facts and documentation to the IRS in support of the ERC claims.

The release also provided a more specific time frame for when it would release its ERC withdrawal option for taxpayers that already received and cashed their ERC checks. The IRS stated that this program would be released in December 2023. Recall that this option is in addition to the withdrawal option that the IRS previously announced on October 19, 2023. The first withdrawal program applies to taxpayers that either did not receive their ERC checks or did not cash them. The IRS also announced that it is intensifying its audit activity and criminal investigations on both promoters and businesses that filed improper claims.

It is encouraging that the IRS is cracking down on fraudulent ERC claims by denying more than 20,000 of them in bulk where the entities did not exist or they did not have employees during the relevant time periods, but it begs the question of why this was not done sooner. Perhaps it was, and this announcement is just the latest manifestation of that, but it is not clear. Based on the identified criteria, the recent letters were sent to businesses who fail the most basic of eligibility tests. Such claims are at best grossly negligent, and at worst fraudulent. Identifying these taxpayers did not require sophisticated artificial intelligence; it required simple matching, something the IRS has been doing for decades. The data points for these determinations should have been at the fingertips of the IRS and should have been applied from the outset.

We agree with the IRS that taxpayers filing ERC claims, particularly claims filed after September 14, 2023, the date of the processing moratorium, should seek the advice of a trusted tax professional. The ERC team at Withum can help. Withum has experience preparing thousands of ERC claims and has represented taxpayers in more than 40 IRS audits. We have also worked with counsel on dozens of matters to assess the appropriateness of ERC claims prepared by tax credit shops and other tax preparers.