What You Need to Know if You Received an ERC Disallowance Letter from the IRS

On December 6, 2023, the Internal Revenue Service (IRS) announced that it is mailing letters to more than 20,000 taxpayers disallowing their Employee Retention Credit (ERC) claims. The IRS notes that this “initial round” of disallowance letters is part of its “continuing efforts to combat dubious Employee Retention Credit (ERC) claims” and that the recipients are entities that either “did not exist or did not have paid employees during the period of eligibility.”

So, what do you need to know if you received one of these letters?

As Boston tax lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group, explains, even if the IRS has disallowed a taxpayer’s ERC claim, this does not mean that the taxpayer is safe from further scrutiny. Attempted tax evasion is a federal crime, and, under 26 U.S.C. Section 7201, “[a]ny person who willfully attempts in any manner to evade or defeat any tax imposed by [the Internal Revenue Code]” can face up to a $100,000 fine ($500,000 for corporations) and five years of federal imprisonment.

Business Owners Who Receive ERC Disallowance Letters Need to Make Informed Decisions

With this in mind, business owners who receive ERC disallowance letters from the IRS need to quickly make informed decisions. Was the business’s ERC claim legitimate? If it was, then losing the credit due to disallowance could have significant financial repercussions. But, if it wasn’t, then the disallowance letter might not be the last word from the IRS. If the business is at risk for facing an audit or a criminal investigation involving allegations of ERC fraud, a proactive approach could be essential for avoiding unnecessary consequences.

In any case, making informed decisions requires a clear understanding of the ERC’s eligibility criteria. These criteria changed not only year-to-year but quarter-to-quarter during the COVID-19 pandemic. As a result, many business owners improperly claimed the credit simply because they lacked a clear understanding of the rules that applied at a particular point in time. But, as the IRS has made clear, this is not an excuse for submitting a fraudulent ERC claim, and while proof of willfulness may be necessary to substantiate criminal charges, even unintentional violations can trigger liability for back taxes (i.e., repayment of the business’s ERC refund), interest and penalties.

Recovering fraudulent ERC refunds is a top priority for the IRS heading into 2024. To protect themselves, business owners in Massachusetts who claimed the ERC should consult with a Boston tax lawyer to assess their risk and determine their next steps. This is true regardless of whether they have received an ERC disallowance letter. But, for those who have received one of the IRS’ letters, prompt action may be especially important, as these businesses (among others) are already on the IRS’ radar.

Did You Receive an ERC Disallowance Letter in Massachusetts? Contact Us for More Information

If you have received an ERC disallowance letter in Massachusetts, Boston tax lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group, can help you make informed decisions about your next steps. To schedule a confidential consultation, please call 617-692-2989 or inquire online today.