December 8, 2023

IRS Expands Employee Retention Credit Enforcement

Over the last few months, the IRS has taken several steps to address the high number of ineligible or fraudulent Employee Retention Tax Credit (ERTC) claims.  The most recent step was to place a moratorium on the processing of new claims through the end of the year. This allowed extra time for claims to be reviewed under stricter standards, more intense audit work to be conducted, and criminal investigations to be opened on promoters and businesses. In addition to enhanced enforcement, the agency also created a new resolution program, the ERTC Withdrawal Program, which allows those who may have submitted an ineligible claim to remove it from consideration.

Earlier this week, in IR-2023-230, the IRS provided additional details on the results of enhanced enforcement efforts. Specifically, there will be 20,000 letters sent to taxpayers notifying them of disallowed ERTC claims. These letters specifically address those ineligible because their entity did not exist during the pandemic, or they did not have any employees during the eligibility period. This illustrates just how pervasive aggressive marketers have become when thousands of claims do not meet the most basic criteria. To help clients, prospects, and others, Wilson Lewis has provided a summary of the key information below.

ERTC Disallowance Letters

The letters cover two categories of claims that have been identified and disallowed, including:

• Entity Not in Existence During Eligibility Period – The ERTC applies only to qualified wages paid between March 13, 2020, and December 31, 2021. Businesses established after December 31, 2021, are not eligible to receive this credit under existing program regulations.
• No Paid Employees During Eligibility Period – The ERTC is intended as a credit against qualified wages paid during the pandemic. In fact, it was created to reward those companies that continued to pay employees during a time of significant uncertainty. Therefore, companies that did not pay any wages during the eligibility period would obviously not be eligible.

“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,” said IRS Commissioner Danny Werfel. “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.”

The letters also provide important benefits to taxpayers by helping to avoid audits, repayment, penalties, and interest charges. They also prevent an incorrect refund from going to an ERC promoter and limit the demand on IRS resources by disallowing incorrect credits before they enter the audit process.

It is important to note that if a taxpayer disagrees with the disallowance, they can respond with relevant documentation that supports eligibility or file an administrative appeal.

Contact Us

The Employee Retention Tax Credit is a lucrative federal tax incentive available to organizations that are legitimately eligible. Despite the increased enforcement activities these companies should not be discouraged from participating. Those who have already filed a claim should consult with a qualified tax advisor to ensure they are eligible. If you have questions about the information outlined above or need assistance with a tax or accounting issue, Wilson Lewis can help. For additional information call 770-476-1004 or click here to contact us. We look forward to speaking with you soon.