IRS Sends 20,000 ERC Disallowance Letters, Opens ERC Voluntary Disclosure Program

The Internal Revenue Service (IRS) is continuing to target fraud under the pandemic-era Employee Retention Credit (ERC) program. After announcing a withdrawal option in October 2023 for businesses that claimed the ERC improperly, the IRS sent an “initial round” of more than 20,000 disallowance letters to businesses in December. It followed these efforts with the announcement of a limited-time ERC Voluntary Disclosure Program (ERC-VDP) a few weeks later.

With official estimates putting the cost of ERC fraud in excess of $2 trillion, the IRS is unlikely to stop targeting fraud under the program any time soon. With this in mind, US International Tax Advisors explains what business owners need to know about the options that are available:

If You Received an ERC Disallowance Letter from the IRS

If you received an ERC disallowance letter from the IRS, there may be nothing more you need to do—provided that the letter covers all of the ERC claims your business filed. The IRS is not currently penalizing businesses that receive disallowance letters based on their disallowed credits. However, if you disagree with the IRS’ determination of your business’s eligibility for the ERC, you can respond to the letter with supporting documentation or file an IRS appeal.

If You Haven’t Received an ERC Disallowance Letter from the IRS

If you haven’t received an ERC disallowance letter from the IRS, this doesn’t necessarily mean that you are in the clear. The IRS’ initial round of disallowance letters addresses just a small subset of potentially fraudulent claims. The IRS is continuing to scrutinize businesses’ ERC claims, and while it is sending disallowance letters in some cases, it is also initiating audits and investigations when warranted.

Before you do anything, you will want to carefully assess your business’s ERC eligibility. While many businesses improperly claimed the ERC, there were also many businesses that were eligible for the credit during the 2020 and 2021 tax years. If your business properly claimed the ERC, then you do not need to file for withdrawal.

If you have concerns about the validity of your business’s ERC claim and the IRS hasn’t yet received (or cashed) a refund check from the IRS, withdrawal might be your best option. However, not all businesses are eligible to file for withdrawal, and withdrawing a fraudulent ERC claim can be risky in some cases. The ERC-VDP is an option for businesses that received refunds they weren’t legally entitled to receive. Restrictions apply here, too, and businesses taking advantage of the ERC-VDP must be able to repay 80 percent of their refund and sign a closing agreement with the IRS.

Schedule a Confidential Consultation with US International Tax Advisors

Do you need to know more about your options for resolving ERC-related issues with the IRS? If so, we invite you to schedule a confidential consultation at US International Tax Advisors. To speak with US International Tax Advisors, in confidence, please call 844-796-8565 or send us a message online today.