What to Do If You Might Have Been Ineligible for the Employee Retention Tax Credit Claim

The COVID-19 Pandemic was cause for many new programs to be created by the U.S. government to keep businesses afloat and employees retained in unprecedented times. One of these programs was the Employee Retention Tax Credit (“ERC”) which incentivized employers to retain employees while business was down. The program was available regardless of the size of the employer and included tax-exempt organizations.

To be eligible for the ERC, employers had to (1) be either fully or partially suspended by government order due to COVID during the calendar quarter or (2) have gross receipts below 50% of the comparable quarter in 2019.

The IRS began sending out letters in December 2023 to more than 20,000 taxpayers who received disallowed ERC claims. Letter 105 C, Claim Disallowed is being sent to a first group of taxpayers because the entities either (1) did not exist during the eligibility period (March 13, 2020, through December 31, 2021), or (2) did not have paid employees during the ERC’s applicable time period (ERC is a credit against qualified wages).

Letter 105 is being sent out to taxpayers prior to payment in an effort by the IRS to help ineligible taxpayers avoid audits, repayments, and penalties. Many employers were encouraged to file ERC claims by “promoters” who received monetary commissions based on approval. Issuance of a disallowance letter prevents promoters from receiving funds to which they are not entitled.

The disallowance letters are just one step in the IRS’s process to address ERC claims that continue to come in. The IRS has increased scrutiny over the numerous claims the IRS continues to receive for the ERC long after the eligibility period has ended. 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.”

The IRS has also created a withdrawal process for some taxpayers who applied for the ERC and have not yet received payment or for those who received a check but have not cashed or deposited the check. It is important to note that by filing the proper forms for the withdrawal process, those taxpayers are asking the IRS not to process the entire adjusted employment tax return for the period that includes the ERC claim. Such returns will be treated as having never been filed; however, the IRS will not impose penalties or interest.

For taxpayers who claimed and already received the ERC but were ineligible, the IRS has created a Voluntary Disclosure Program which is open through March 22, 2024. This program allows for voluntary payback of the ERC, minus 20%. The taxpayer must also cooperate with any requests from the IRS for more information and sign a closing agreement. The IRS website has more specific requirements to determine eligibility for the Voluntary Disclosure Program.

According to Commissioner Werfel, “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 rule 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.”

If you have filed an ERC claim and think you may not have been eligible, talk to a trusted tax professional and explore your options.

Posted by Attorney Jaime L. Curry. Curry frequently works with owners of closely-held businesses, providing guidance on business formational structure, governance, and asset protection. She also assists individuals, families, and business owners with navigating their estate and tax planning to plan for their futures.