Business shocked by an IRS employee retention credit letter: “I need to pay this off. The interest is killing me”
The IRS has announced plans to mail up to 30,000 letters to taxpayers to reverse or recapture improperly paid ERC claims.
In the midst of economic recovery from the covid-19 pandemic, many businesses that relied on the Employee Retention Credit (ERC) to stay afloat are now facing a new challenge: ERC recapture letters from the Internal Revenue Service (IRS). As the IRS intensifies its efforts to reclaim improperly paid ERC funds, receiving such a letter can be daunting.
This is the second round of recapture letters. Previously, the IRS sent letters to more than 12,000 entities for tax year 2020, resulting in $572 million in assessments. The latest letters generally involve larger recapture amounts since Congress increased the maximum ERC from $5,000 per employee per year in 2020 to $7,000 per employee for each quarter of the year 2021.
At the American Institute of Certified Public Accountants & Chartered Institute of Management Accountants National Tax Conference on November 12, National Taxpayer Advocate Erin M. Collins stated:
“We get a lot of people reaching out to us and saying, ‘I mortgaged my home because I thought I was going to get this ERC money so I could keep my business afloat. I need to pay this off. The interest is killing me.’ Or ‘I paid my employees out of my assets to keep them on the roll. I need this money back.’ I’ve had people saying they’re possibly going to shut down. They’re going to have these challenges so we are trying to help those individuals, and it is not as fast as I would like.”
Here’s what you need to know and the steps you should take if you find yourself in this situation.
What the Employee Retention Credit letters mean
ERC Recapture Letters are issued when the IRS determines that a taxpayer has received excessive or erroneous ERC funds. The IRS treats these erroneous refunds as underpayments of relevant employment taxes, which can be assessed and collected through normal tax assessment and collection procedures.
To qualify, a cliamant’s business had to have been fully or partially suspended by a governmental order due to covid-19. They also need to have experienced a significant decline in gross receipts (more than 50% in 2020 or any quarter in 2021 compared to the same quarter in 2019). Once gross receipts exceed 80% of the comparable quarter in 2019, eligibility ends.
Dealing with the letter
If you believe your ERC claim was wrongfully denied, you have the right to appeal the IRS’s decision. You can file a written protest to the office provided in the ERC disallowance letter, which must be submitted within the specified timeframe, typically 30 days. There are two types of protests: a small case request or a formal written request. Ensure you follow the instructions in the letter and include all applicable business information, relevant documents, and explanations to support your ERC claim.
Refer to IRS Publication 5 for detailed guidance on which type of protest to file.
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