ERC Updates: IRS Sends “Initial Round” of Disallowance Letters and Opens Limited-Time Voluntary Disclosure Program

As the IRS continues to combat an estimated $2 trillion in fraudulent Employee Retention Credit (ERC) claims, it is targeting businesses that improperly claimed the credit through various means. After establishing a withdrawal process for pending claims in October 2023, the IRS sent an “initial round” of disallowance letters in December, and it opened a limited-time ERC Voluntary Disclosure Program (ERC-VDP) a few weeks later.

Business owners who claimed the ERC need to ensure that they are making informed decisions, as New Jersey tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, explains:

What Business Owners Need to Know if They Received an ERC Disallowance Letter

If you received an ERC disallowance letter from the IRS in December 2023, this means that the IRS determined your business was ineligible for the credit for one of two reasons. Either:

• Your business was not in existence between March 13, 2020, and December 31, 2021; or,
• Your business did not pay any qualifying wages during this eligibility period.

If you agree with the IRS’ determination of your business’s eligibility, then you may simply be able to move on—provided that the letter covers all ERC claims your business filed. However, if your business still has another ERC claim pending, you will want to assess the validity of this claim promptly, and if you disagree with the IRS’ determination, you will want to speak with a tax attorney about responding to the letter or filing an administrative appeal.

What Business Owners Need to Know if They Haven’t Received an ERC Disallowance Letter

Business owners who haven’t received an ERC disallowance letter from the IRS should promptly review their ERC filings with their tax counsel. As the IRS noted when announcing its initial round of disallowance letters, it “has hundreds of criminal cases being worked, and thousands of ERC claims have been referred for audit.” In other words, while the IRS is simply disallowing some credits, it is also pursuing enforcement as warranted.

For businesses that have submitted ERC claims but have not yet received (or cashed) refund checks from the IRS, filing for withdrawal may be the best approach. For those that have received refunds, submitting a voluntary disclosure under the ERC-VDP may be necessary. However, both options are subject to specific eligibility criteria, and both present risks. As a result, informed decision-making is critical. To ensure that you are making the right decision, you should consult with experienced tax counsel before voluntarily providing any information to the IRS.

Request an Appointment with New Jersey Tax Attorney Kevin E. Thorn

New Jersey tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, is actively representing businesses and their owners in ERC compliance matters. If you need to ensure that you are making informed decisions, we invite you to get in touch. To request an appointment with Mr. Thorn, please call 201-842-7696 or tell us how we can reach you online today.