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Note: The September 2023 refund claim processing moratorium remains in place and the IRS made it clear that it does not currently have a plan to end the moratorium, citing concerns about triggering “a gold rush by aggressive marketers that could lead to a new round of improper claims.”

Have Questions? Call us for Your consultation.

In IR-2024-169,1 the Internal Revenue Service (the “IRS” or the “Service”) announced that it has recently completed an extensive review of over one million refund claims made under the Employee Retention Credit (“ERC”) program. The pending claims have been broadly divided into three categories. The first category, which the IRS refers to as the “highest risk group,” consists of 10 to 20 percent of the backlog, and show “clear signs of being erroneous claims.” The second category represents between 60 and 70 percent of the claims and is considered to show “an unacceptable level of risk.” The IRS had indicated it will need more time to analyze the claims in this category and will collect additional information to prevent any improper refunds.  Taxpayers in this category may receive a Letter 6612, Notice of Audit and Request for ERC Related Documentation.

On a positive note, the Service confirmed that 10 to 20 percent of the ERC refund claims fall into a “low-risk” category. The IRS plans to process these claims and expects to make the first payments to eligible employers later this summer. The oldest applications in the low-risk category will be processed first, but any refund claim submitted after the moratorium was put in place still will not be processed.

What Should Taxpayers Expect?

The Service has not provided a specific timeline for processing ERC refund claims. However, it has announced plans to deny a large number of refund claims in the coming weeks and months but also aim to distribute refunds for low-risk claims albeit at “a dramatically slower pace than payments that went out during the pandemic period”; this is likely to happen later this summer.

Additionally, IRS is contemplating reestablishing an ERC-related Voluntary Disclosure Program, which previously ended last March.2 In the Information Release, the IRS also highlighted that the ERC Withdrawal Program remains available for businesses with pending refund claims if they have determined their ineligibility for the purposes of ERC.3

What’s Next? Taxpayers Must Monitor Their Mailboxes Vigilantly

In the next few weeks and months, the IRS is set to disallow “tens of thousands” of refund claims that it has determined fall into the highest risk category. Practitioners have not been advised by the Service exactly what went into developing that risk profile and so taxpayers who filed refund claims before moratorium should monitor their mailbox for any correspondence from the IRS. These rejections will most likely be communicated through letters of disallowance. 

Letters of disallowance serve multiple purposes. It not only provides taxpayers with important information and notifies them of their rights, but also includes details about what is being disallowed and the reasons for such disallowance.4 The IRS utilizes a variety of forms for the letters of disallowance. The following is a non-exhaustive list of possible letters and notices that the Service may use to communicate that it disagrees with a taxpayer’s eligibility for ERC:

  • Letter 105C, Notice of Claim Disallowance
  • Letter 106C, Notice of Partial Claim Disallowance
  • Letter 905, Final Partial Claim Disallowance
  • Letter 906, Final Full Claim Disallowance

Other letters include:

  • Letter 6577, Employee Retention Credit (ERC) 2020 W-2
  • Letter 950-D, Employment Tax 30 Day Letter
  • Letter 5376, Full/Partial Claim Disallowance for Employment Tax
  • Letter 6362, COVID-19 Employer Credit Disallowance Letter for PPP Loan Recipient or Government Entity
  • Letter 6362-A, COVID-19 Employer Credit Disallowance for Third Party Payor Reporting a Government Entity

Each of the disallowance letters mentioned above will include a section detailing the rights of the taxpayer and should be sent by certified or registered mail. These rights may include the ability to appeal the disallowance within 30 days5 and the entitlement to file a refund claim suit in a United States District Court or the United States Court of Federal Claims within a two-years.6

How Can We Help?

Frost Law attorneys have significant experience in tax controversy matters, ERC eligibility analysis, and refund claim disputes. If you have any questions regarding the IRS statement or your ERC claims, don't hesitate to reach out to us at (410) 862-2890 or schedule a confidential consultation with our team of tax attorneys.

Footnotes

  1.  IRS, IR-2024-169, IRS enters next stage of Employee Retention Credit work; review indicates vast majority show risk of being improper (2024).
  2. For more information, please visit https://www.irs.gov/coronavirus/frequently-asked-questions-about-the-employee-retention-credit-voluntary-disclosure-program
  3.  For more information, please visit https://www.irs.gov/newsroom/withdraw-an-employee-retention-credit-erc-claim
  4. IRC § 6402(l)
  5. For more information on appealing ERC disallowance, see https://askfrost.com/news/appealing-denied-erc-refund
  6. Pursuant to U.S.C. §6532(a)(1), the IRS must send a letter of disallowance by certified or registered mail to start the two-year period for a taxpayer to file a refund claim.
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IRS Plans to Deny Billions in Improper Claims and Keep Processing Moratorium in Place

Published on
June 21, 2024
Documents on a table with the wording Employee Retention Tax Credit
Author
Glen Frost
Managing Partner
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Note: The September 2023 refund claim processing moratorium remains in place and the IRS made it clear that it does not currently have a plan to end the moratorium, citing concerns about triggering “a gold rush by aggressive marketers that could lead to a new round of improper claims.”

Have Questions? Call Our Team Today.

In IR-2024-169,1 the Internal Revenue Service (the “IRS” or the “Service”) announced that it has recently completed an extensive review of over one million refund claims made under the Employee Retention Credit (“ERC”) program. The pending claims have been broadly divided into three categories. The first category, which the IRS refers to as the “highest risk group,” consists of 10 to 20 percent of the backlog, and show “clear signs of being erroneous claims.” The second category represents between 60 and 70 percent of the claims and is considered to show “an unacceptable level of risk.” The IRS had indicated it will need more time to analyze the claims in this category and will collect additional information to prevent any improper refunds.  Taxpayers in this category may receive a Letter 6612, Notice of Audit and Request for ERC Related Documentation.

On a positive note, the Service confirmed that 10 to 20 percent of the ERC refund claims fall into a “low-risk” category. The IRS plans to process these claims and expects to make the first payments to eligible employers later this summer. The oldest applications in the low-risk category will be processed first, but any refund claim submitted after the moratorium was put in place still will not be processed.

What Should Taxpayers Expect?

The Service has not provided a specific timeline for processing ERC refund claims. However, it has announced plans to deny a large number of refund claims in the coming weeks and months but also aim to distribute refunds for low-risk claims albeit at “a dramatically slower pace than payments that went out during the pandemic period”; this is likely to happen later this summer.

Additionally, IRS is contemplating reestablishing an ERC-related Voluntary Disclosure Program, which previously ended last March.2 In the Information Release, the IRS also highlighted that the ERC Withdrawal Program remains available for businesses with pending refund claims if they have determined their ineligibility for the purposes of ERC.3

What’s Next? Taxpayers Must Monitor Their Mailboxes Vigilantly

In the next few weeks and months, the IRS is set to disallow “tens of thousands” of refund claims that it has determined fall into the highest risk category. Practitioners have not been advised by the Service exactly what went into developing that risk profile and so taxpayers who filed refund claims before moratorium should monitor their mailbox for any correspondence from the IRS. These rejections will most likely be communicated through letters of disallowance. 

Letters of disallowance serve multiple purposes. It not only provides taxpayers with important information and notifies them of their rights, but also includes details about what is being disallowed and the reasons for such disallowance.4 The IRS utilizes a variety of forms for the letters of disallowance. The following is a non-exhaustive list of possible letters and notices that the Service may use to communicate that it disagrees with a taxpayer’s eligibility for ERC:

  • Letter 105C, Notice of Claim Disallowance
  • Letter 106C, Notice of Partial Claim Disallowance
  • Letter 905, Final Partial Claim Disallowance
  • Letter 906, Final Full Claim Disallowance

Other letters include:

  • Letter 6577, Employee Retention Credit (ERC) 2020 W-2
  • Letter 950-D, Employment Tax 30 Day Letter
  • Letter 5376, Full/Partial Claim Disallowance for Employment Tax
  • Letter 6362, COVID-19 Employer Credit Disallowance Letter for PPP Loan Recipient or Government Entity
  • Letter 6362-A, COVID-19 Employer Credit Disallowance for Third Party Payor Reporting a Government Entity

Each of the disallowance letters mentioned above will include a section detailing the rights of the taxpayer and should be sent by certified or registered mail. These rights may include the ability to appeal the disallowance within 30 days5 and the entitlement to file a refund claim suit in a United States District Court or the United States Court of Federal Claims within a two-years.6

How Can We Help?

Frost Law attorneys have significant experience in tax controversy matters, ERC eligibility analysis, and refund claim disputes. If you have any questions regarding the IRS statement or your ERC claims, don't hesitate to reach out to us at (410) 862-2890 or schedule a confidential consultation with our team of tax attorneys.

Footnotes

  1.  IRS, IR-2024-169, IRS enters next stage of Employee Retention Credit work; review indicates vast majority show risk of being improper (2024).
  2. For more information, please visit https://www.irs.gov/coronavirus/frequently-asked-questions-about-the-employee-retention-credit-voluntary-disclosure-program
  3.  For more information, please visit https://www.irs.gov/newsroom/withdraw-an-employee-retention-credit-erc-claim
  4. IRC § 6402(l)
  5. For more information on appealing ERC disallowance, see https://askfrost.com/news/appealing-denied-erc-refund
  6. Pursuant to U.S.C. §6532(a)(1), the IRS must send a letter of disallowance by certified or registered mail to start the two-year period for a taxpayer to file a refund claim.