Employee Retention Credit (ERC)
Moral of the ERC story:
DON’T PANIC! Don’t give up. Consult with a tax credit professional.
In August 2024, IRS activity recommenced. It (slowly) began processing some ERC refunds. And it began mailing waves of letters disallowing claims (Letter 105C or Letter 106C). Unfortunately, many of those disallowance letters were inaccurate or incorrect—even if the business owners didn’t know that. Many reacted as we all do when we receive a letter from the IRS telling us we did something wrong. They PANICKED! Or gave up. Which is what the IRS was hoping for.
Despite explicitly stating on the letter that there are 30 days to respond, the IRS clarified that you have 2 years to appeal the disallowance (and added some other food for thought).
In October 2024, the IRS issued even more disallowances (and also processed more refunds).
In November 2024, the IRS began issuing Letter 6612 with an accompanying Form 4564 (Information and Document Request aka “IDR”) for ERC claims that have not been paid. This pre-examination of claims has been expected, though it departs from the IRS’s historical approach of auditing tax claims after they’ve been processed.
What happens next? Stay tuned…
What is going on with ERC these days? Well, for a while … nothing. Then around August 2024, things started to move again. But let’s back up.
ERC started in March 2020 as a stimulus to help businesses weather the COVID pandemic. By mid-2023, the IRS had processed 3.6 million ERC claims—but they realized they had no way of distinguishing legitimate claims from invalid ones. In September 2023, the IRS instituted a “moratorium” on processing ERC claims.
But that was just a media spectacle. Really, the IRS needed to buy time to figure things out: to train agents on this complex program, to put systems in place to effectively and efficiently process ERC claims, to high-level understand what they knew and didn’t know. The IRS began calling it fraud and putting ERC at the top of its “dirty dozen” list. And the media followed along.
In January 2024, the House passed legislation that would pre-maturely end all ERC claims on January 31st and extend the IRS’s audit window. A LOT of claims were filed. The Senate sat on the bill—the joke was on the small and mid-sized businesses once again.
As recently as June 2024, the IRS said most claims have an “unacceptable risk of ineligibility”. But … they had a plan. We will disallow 10% that carry a high risk of being invalid and process 10% that carry a low risk of ineligibility. And then we’ll tackle the ones in the middle.