When the IRS outlined its next steps for employee retention credit fraud enforcement, it said it would begin sending out disallowance letters to the 10% to 20% of employers that clearly didn’t qualify for the credit. Those letters have now started to flow. Recipients—or, more likely, their lawyers—have noticed some egregious errors.
Letter 105C
If the IRS disallows your ERC claim, you will receive Letter 105C, Claim Disallowance. Upshot: Your tax account will be adjusted, possibly resulting in a reduced refund or balance due, or no refund at all.
As upsetting as receiving Letter 105C is, the IRS has reportedly made mistakes, so examine the letter carefully for errors. The IRS’ errors fall into two categories:
Substantive errors: The IRS has determined you didn’t qualify for the ERC for the calendar quarters listed. Point your browser here for an ERC eligibility checklist.
Procedural errors: In some instances, the IRS has neglected to include a pamphlet advising you of your appeal rights, should you disagree with its determination.
You have 30 days to protest the IRS’ determination with the Independent Office of Appeals, so you will need to act fast. If you determine you were eligible for the ERC, you need to work with your tax advisor to ensure you’ve provided as much information regarding your eligibility as possible to the IRS employee named in your letter:
The government order requiring you to fully or partially suspend your business operations and the calendar quarters you were shut down
Your Forms 941 or 941-X and worksheets on which you claimed the ERC
Employees who received wages and/or health benefits on which your ERC was based
Documents showing the wages you paid employees, the health benefits they received and how you apportioned those health benefits
The drop in your quarterly gross receipts, if this is the basis for your ERCs.
Also include a copy of the IRS’ letter, the name of your business, address, phone number and EIN. Your statement must be signed under penalties of perjury: “Under penalties of perjury, I declare that this information, to the best of my knowledge and belief, is true, correct, and complete.”
If you don’t agree with Appeals’ decision, you can sue in the federal trial court for your area or the Court of Federal Claims. But the clock keeps ticking. The time frame to sue is generally two years from the date of the disallowance letter.
And the clock continues ticking if you decide to ask Appeals to reconsider. If you don’t sue and Appeals ultimately concludes your claim was correct, you won’t receive a refund or credit if Appeals reaches its decision after the two-year period for filing suit expires.
Upshot: While you can continue to try to resolve the claim with the IRS, as you approach the end of the two-year period specified in the letter, you may want to file a timely suit to protect yourself.
Also denied: Lawsuit requiring the IRS to process those jammed-up 941-Xs
Stenson Tamaddon, LLC, an ERC advisory firm, sued the IRS requesting that the court issue a preliminary injunction to force it to end the moratorium and process the 941-X forms on which the credit is claimed.
Asking a federal court for a preliminary injunction was a long shot, which has now failed. Court: Although the plaintiff raises serious questions regarding the IRS’ actions, those questions don’t warrant preliminary injunctive relief. The status quo prevails.
The case is Stenson Tamaddon, LLC v. IRS.
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