IRS Sends “Initial Round” of 20,000 Disallowance Letters to Businesses That Claimed the ERC

The Internal Revenue Service (IRS) announced on December 6, 2023, that it is sending an “initial round” of more than 20,000 disallowance letters to businesses that claimed the Employee Retention Credit (ERC). According to the IRS’ News Release, the letters are being sent to “entities that did not exist or did not have paid employees during the period of eligibility,” and they reflect the agency’s “increased scrutiny of ERC claims in response to misleading marketing campaigns that have targeted small businesses and other organizations.”

The IRS’ Disallowance Letters Are Its Latest Effort to Combat ERC Fraud

The fact that the IRS has labeled these letters as an “initial round” signals that more will be forthcoming, and the IRS’ News Release also references a forthcoming special voluntary disclosure program specifically for fraudulent ERC claims. These efforts underscore the IRS’ focus on combating ERC fraud heading into 2024, as well as the need for business owners to consult with a Washington D.C. tax attorney if they have any concerns about the validity of their ERC claims.

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

While the IRS’ disallowance letters are directed to businesses that haven’t yet received ERC payments, those that receive these letters can still face risks. The Internal Revenue Code (IRC) imposes the same penalties for attempted and successful tax evasion. Under 26 U.S.C. Section 7201, willfully attempting to evade federal tax liability carries up to a $100,000 fine ($500,000 for corporations) and five years of federal imprisonment. Thus, if the IRS’ decision to disallow a business’s ERC claim is based on suspected willful misconduct, the business (and its owners) could be at risk for a criminal tax fraud investigation.

With this in mind, business owners who receive ERC disallowance letters need to make informed decisions. At this stage, there is not a single clear path to avoiding prosecution. While targeted businesses (and business owners) may be able to deploy various defense strategies, they will need to choose their strategy carefully—and they will want to do so before the IRS launches an audit or investigation if possible.

Business Owners Who Don’t Receive ERC Disallowance Letters Still Face Risks

Importantly, business owners who don’t receive ERC disallowance letters aren’t necessarily in the clear. As the IRS’ New Release states, the initial round of letters is being sent only to a very specific subset of ERC claimants. Subsequent rounds are likely to be similar in this regard. The IRS is actively targeting businesses (and their owners) for ERC fraud, and once the IRS initiates an audit or investigation, the options that the target has available diminish significantly.

Discuss Your Business’s ERC Claim with Washington D.C. Tax Attorney Kevin E. Thorn

If you need to speak with an attorney about your business’ ERC claim, we encourage you to get in touch. To schedule an appointment with Washington D.C. tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, please call 202-349-4033 or contact us confidentially online today.