In a bold move to combat fraudulent claims, the Internal Revenue Service (IRS) is taking decisive action against questionable Employee Retention Credit (ERC) applications. More than 20,000 rejection letters are being dispatched as part of the IRS’s crackdown on scammers and promoters who have been encouraging businesses to file dubious pandemic tax credit claims.
The IRS imposed a moratorium in September, halting the processing of new ERC claims until the end of the year due to an overwhelming surge in claims facilitated by so-called “ERC mills.” These mills aggressively promoted the tax credit through various channels, including TV, radio, billboards, and robocalls. Commissioner Danny Werfel revealed that the IRS had been inundated with 3.6 million ERC claims, with over 600,000 still pending, most of which were submitted within the last 90 days.
To address the issue, the IRS introduced a withdrawal process in October, allowing businesses to retract questionable ERC claims before facing penalties. The agency also urged tax professionals to assist clients through this process. Now, in a proactive move, the IRS is issuing disallowance letters to ineligible claimants, with an initial batch of 20,000 underway.
An initial review revealed that a substantial number of taxpayers still needed to meet the basic criteria for the ERC. Entities either did not exist during the eligibility period or needed more employees when claiming the credit. The disallowance letters, labeled as Letter 105 C, Claim Disallowed, will notify ineligible taxpayers, offering them the opportunity to provide documentation supporting their eligibility or claim amount. Those in disagreement can also file an administrative appeal.
Werfel emphasized the importance of compliance and urged claimants to review the rules with trusted tax professionals. The IRS, which is engaged in hundreds of criminal cases and thousands of ERC claim audits, is set to send more disallowance letters in the near future.
The disallowance initiative aims to help ineligible taxpayers avoid audits, repayment, penalties, and interest. It also protects taxpayers from incorrect refunds going to ERC promoters and conserves IRS resources by addressing inaccurate claims before entering the audit process.
Eric Hylton, national director of compliance at tax consulting firm Alliantgroup, sees this as a pivotal moment for the IRS to demonstrate the extent of potential fraud surrounding the ERC. The disallowance letters, he notes, not only prevent funds from being distributed to nonexistent entities but also underscore the IRS’s commitment to stringent compliance efforts.
Beyond the disallowance letters, the IRS is finalizing plans for a particular voluntary disclosure program related to ERC claims, which is set to be announced later this month. The move signals the IRS’s determination to weed out bad actors and ensure the legitimacy of claims due to rampant fraudulent activities surrounding the ERC.
Source ( Accounting Today News).
