IRS disallows 20K Employee Retention Credit claims amid crackdown

The Internal Revenue Service is sending more than 20,000 letters rejecting questionable claims for the Employee Retention Credit as it continues to combat scammers and promoters encouraging businesses to file claims for the pandemic tax credit.

In September, the IRS declared a moratorium on P-rocessing new ERC claims through the end of the year after receiving a flood of claims pushed by so-called "ERC mills" advertising the tax credit on TV, radio, billboards and robocalling pitches. At the time, IRS Commissioner Danny Werfel said the IRS has received around 3.6 million ERC claims, and its inventory of open claims was over 600,000, nearly all of which had been received within the past 90 days. 

In October, the IRS offered a process for businesses to withdraw any dubious ERC claims before they face penalties and encouraged tax professionals to work with their clients to help them through the process. Later this month, the agency plans to offer a separate voluntary disclosure program allowing those who received questionable payments to come forward and avoid future IRS action. Now the IRS is sending out an initial round of 20,000 disallowance letters, with more on the way. 

After an initial review this fall, the IRS found that a large number of taxpayers did not meet basic criteria for the credit. Starting this week, taxpayers who are ineligible for the credit will begin receiving copies of Letter I 05 C, Claim Disallowed. The letters will cover those taxpayers who are deemed to be ineligible for the ERC either because their entity didn't exist or didn't have employees for the time period when the credit was claimed. 

"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," Werfel said in a statement Wednesday. "The action we are taking today is part of an initial set of steps in our compliance work in this area, and 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. 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. 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."