Navigating IRS Letters: Responding to Employee Retention Tax Credit Claims
Navigating IRS Letters: Responding to Employee Retention Tax Credit Claims
The Employee Retention Tax Credit (ERC) provided a vital lifeline for many businesses impacted by the COVID-19 pandemic. In recent months, the IRS has finally been making some progress in processing the backlog of ERC related 941-x’s. As a result, some employers who hadn’t seen progress on their ERC claims for a year or more are finally starting to movement (while many others are still lingering).
With this ramp up in IRS activity regarding ERC claims, there has been an additional level of scrutiny, leading to an increasing number of businesses receiving official letters regarding their credit. If you’ve received an IRS letter concerning your ERC claim, don’t panic – but do act promptly and strategically.
Common IRS ERC Letters and How to Respond
Letter 105-C: Full Disallowance of ERC Claim/Letter 106-C: Partial Disallowance of ERC Claim
Letter 105-C/Letter 106-C are formal notifications that the IRS has denied all or part of your ERC claim, often without prior request for supporting documentation. It will state the reason for the disallowance, the tax period in question, and your appeal rights.
How to Respond:
• Review the Reason: Understand why the IRS disallowed your claim (e.g., lack of eligible government orders, insufficient gross receipts decline).
• Verify Accuracy (Letter 106-C): Re-calculate your ERC claim based on the IRS’s stated reasons for disallowance to see if you agree with their adjustment.
• Correct Errors (if applicable): If the partial disallowance was due to a calculation error or incorrect information on your part, correct these mistakes and gather documentation to support the correct figures.
• Gather Supporting Evidence: Collect all documentation that directly refutes the IRS’s stated reason for disallowance and supports your original claim. This should include detailed evidence of gross receipts, government mandates, and qualified wages.
• Dispute Within 30 Days (Recommended): While you generally have two years from the date of the disallowance letter to contest the decision in court, it’s highly advisable to send your dispute and request an appeal to the IRS Independent Office of Appeals within 30 days. This helps preserve your appeal rights and can initiate the administrative appeal process earlier.
• Prepare a Written Explanation: Provide a clear, detailed written explanation of why you believe you are entitled to the ERC, addressing each point of the IRS’s disallowance. Include all relevant facts and supporting documents.
• Request an Appeal: Explicitly state in your response that you wish to appeal the disallowance to the IRS Independent Office of Appeals.
• Consult a Tax Professional
4. ERC Recapture Letters (can also be 6577C)
These letters inform businesses that the IRS is proposing to reduce the ERC amount previously received and may require repayment of a portion of the refund. This can happen due to mathematical filters or errors in original Form 941 filings. Often, the IRS is refuting some or all of an ERC claim without any factual information to base this on.
How to Respond:
• Thorough Review: Understand which quarters are being adjusted and why.
• Agree to Adjustment: If you agree with the proposed recapture, sign the statement provided in the letter and arrange for repayment.
• Dispute Adjustment: If you disagree, respond with a detailed explanation and supporting documents. This may involve reconciling employee counts to total wages or addressing errors on your original Form 941.
• Act Promptly: These letters often have a limited response window (sometimes as little as three weeks). Missing the deadline can complicate resolution.
Receiving an IRS letter about your ERC claim can be stressful, but by understanding the common letters and following these guidelines, you can respond effectively and navigate the process with greater confidence.