IRS rejects claims from 20,000 taxpayers for lucrative small business tax credit

The IRS is taking action against small businesses that improperly filed returns claiming a lucrative pandemic-era tax credit.

The agency sent 20,000 correspondence letters disqualifying these taxpayers from claiming the Employee Retention Credit, or ERC. Officially known as Letter 105 C Claims Disallowed, the letters targeted two types of filers that were ineligible: entities that did not exist or businesses with no paid employees during the claim period between March 13, 2020, and Dec. 31, 2021.

This was the agency’s first batch of rejection letters to taxpayers in an extended effort to combat incorrect or even fraudulent claims of the ERC credit.

“With the aggressive marketing we saw with this credit, it’s not surprising that we’re seeing claims that clearly fall outside of the legal requirements,” IRS Commissioner Danny Werfel said in the press release. “The action we are taking today is part of an initial set of steps in our compliance work in this area, and more letters will be going out in the near future, including both disallowance letters and letters seeking the return of funds erroneously claimed and received.”

The prevalence of incorrect ERC returns — especially around the basic eligibility requirement — stoked the agency’s concerns over ERC pop-up firms that were aggressively marketing the credit to unaware small businesses, many of which were ineligible for the credit.

“Anytime that you have a credit that has been issued, you’re going to have some unscrupulous individuals who’s going to try to take advantage of it” Eric Hylton, national director of compliance at alliant and former IRS deputy chief of the criminal investigation division, told Yahoo Finance.

Expanded effort to uncover suspicious ERC claims

The IRS has been increasing its ERC compliance endeavors over its concerns.

The earliest effort was in September when the tax agency put a moratorium on filing for the credit. It then asked small business owners to review pending claims and voluntarily withdraw any suspicions ones in October. Now, the agency is beginning its wave of rejection letters to unqualified businesses.

“This is a part of their overall compliance strategy to address this enormous situation,” Hylton said. “[The IRS] came up with the moratorium to filter through the employee retention credit issue so that they could actually get to the legitimate claim.”