Employee Retention Credit (ERC)

Random ERC-related things you may want to know.

Letter 6612. Informs you that the IRS is auditing something. For ERC, this letter was typically used to audit ERC claims the IRS had already refunded. Now, the IRS uses Letter 6612 to pre-emptively examine ERC claims prior to paying the refund. To succeed and receive your refund, you must demonstrate the merits of your claim in a clear and concise manner.

Letter 105C. Informs you that the IRS is disallowing your ERC claim in full for the stated tax period. The letter will tell you why. Mostly, the IRS does not have the information necessary to make an informed determination of the legitimacy of your ERC claim. You need to provide the information and make it easy for them.

Letter 106C. Informs you that the IRS is disallowing a portion of your ERC claim (and allowing a portion) for the stated tax period. The letter will tell you why. Again, the IRS does not have the information necessary to make an informed determination of the legitimacy of your ERC claim. Again, you need to spell out the merits of your ERC claim to have the full claim amount allowed.

Form 4564. This is the Information and Document Request (IDR) used in an audit (examination) of an ERC claim. For ERC, it typically includes 13 items.

  • Let’s be clear. If you receive any of the letters above, you have to do the same thing. You have to prove to the IRS that your claim is valid across all elements of the ERC program. See below.

Statute of Limitations. The “statute of limitations” (SOL) is the time in which someone is permitted to take a certain action under the law. As it relates to ERC, taxpayers may amend their Forms 941 (using Form 941-X) to claim ERC up to 3 years after the original Form 941 is filed. Forms 941 are deemed filed on April 15th of the year following the calendar year to which the quarterly returns pertain. E.g. 2020 Forms 941 are deemed filed on April 15, 2021; therefore, the SOL to amend 2020 returns (to claim 2020 ERC) ended on April 15, 2024. The IRS has the same 3-year SOL to assess additional tax on a return.

  • 2021 ERC may be claimed on 2021 Forms 941-X until April 15, 2025. If Congress doesn’t prematurely end it.

  • Now we see why the IRS is holding off on processing refunds. There is no SOL on examining claims of refund to a taxpayer—only on examinations that would result in the taxpayer owing the IRS money.

  • Fraud. There is no SOL if fraud is suspected. Rightly or (more likely) wrongly, the IRS has been screaming about fraud in ERC for over a year. Could it be that they intend to audit refunds already paid beyond their SOL, using fraud as the justification?

Voluntary Withdrawal Program (VWP). The IRS developed a process whereby employers who filed an ERC claim that has not yet been processed by the IRS can withdraw that claim—no questions asked. Why would an employer do that? If they learn after the ERC was filed that the claim was not valid (e.g. their initial ERC vendor did not perform due diligence to support eligibility based on a suspension of operations).

Voluntary Disclosure Program (VDP). Similar to VWP, VDP is a process for employers whose ERC claim has already been refunded to repay the ERC claim. Why would an employer do that? Same as above—they discover too late that their claim was not valid. The benefit of using VDP is that employers only have to repay 85% of their claim, and no penalties or interest will apply (contrasted with the claim being disallowed in audit). The most recent window for VDP closed on November 22, 2024. TBD if the IRS will create a 3rd round of VDP.

Will your ERC claim survive IRS scrutiny?

If you received Letter 105C, Letter 106C, or Letter 6612, you will need to clearly demonstrate that your ERC claim satisfies the all ERC elements. Here is a basic blueprint:

  1. Who is the “employer”? Demonstrate ownership and any necessary aggregation.

    • The employer determines which entities are brought together to analyze employer size and eligibility.

  2. What is the employer’s size? Use 2019 Form 1094-C, 2019 Forms 941, or another reasonable method.

    • The rules may vary if you have over 100 or over 500 full-time employees.

  3. Eligibility

    1. Gross Receipts. Demonstrate the requisite 50% or 20% quarterly decline based on your P&Ls, and tie the numbers used to your annual income tax return.

    2. Suspension of Operations. You need a detailed statement of facts, all applicable government orders, and thorough legal analysis to tell your story in a compelling manner. It requires both qualitative and quantitative support.

  4. Qualified Wages. You need detailed payroll by employee by paycheck that ties out to the wages stated on the corresponding quarterly Form 941.

  5. ERC Computation. Follow all the calculation rules and exclude owners + their family, payroll costs allocated to PPP, parsonage wages, other credits, etc.

  6. PPP information. Provide your PPP forgiveness application and forgiveness letter. The amounts should tie to your ERC computation.

  7. Other documents. The IRS may request that your provide any/all of the following federal tax filings. Yes, really. I agree it feels like the IRS should already have them and be able to access them, but they can’t. I hear you, but debating the logic of this request will get us nowhere—let’s just provide what they asked for.

    • 2019 - 2021 income tax returns

    • 2019 - 2021 payroll tax returns

    • 2019 - 2021 Forms W-2