How to Respond to IRS Investigations of Erroneous Employee Retention Credit Claims

 Posted on April 14,2024 in Employment Taxes

The Employee Retention Credit (ERC) was created by the IRS to address financial difficulties faced by employers in 2020 and 2021 due to the pandemic. It provided credits for payroll taxes paid by employers who met certain criteria. However, some employers claimed this credit erroneously. Some promoters of tax return preparation services have encouraged employers to claim these credits even when they were ineligible to do so. These cases have included claims made in 2022 or subsequent years, even though the ERC only covered the tax years of 2020 and 2021. Now, the IRS is taking action to recover claims that were paid out incorrectly, and some employers may be unsure about whether they will be required to repay the IRS for the credits they received.

Because of the large amounts of money that may be involved in these cases, employers may be concerned about their ability to make payments to the IRS. Taxpayers who have received letters from the IRS about erroneous ERC claims or those who have been audited can work with an attorney to determine their best options and minimize the potential penalties they may face.

Addressing ERC Claims With the IRS

The IRS had put a voluntary disclosure program in place allowing employers to repay incorrect ERC claims with a 20% discount and without being assessed interest on the credits they had received. However, this program was suspended on March 22, 2024. This option may become available again in the future, but for now, other steps will need to be taken by employers who claimed erroneous credits.

More than 12,000 taxpayers have been informed by the IRS that they had made erroneous ERC claims. These letters covered claims made for the 2020 tax year0. During that period, qualifying employers were able to claim credits of $5,000 per employee per year. The IRS will also be sending letters to address claims made for the 2021 tax year. These claims may be more substantial, since the maximum ERC for this period was $7,000 per employee per quarter.

For the tax years of 2020 and 2021, the IRS will be investigating situations where employers claimed credits when they were not eligible to do so. For tax years after 2021, any ERC claims will be investigated, since the program was no longer in effect at this time. 

If ERC claims were made incorrectly, employers will be required to repay 100% of the credits they received, along with penalties and interest. Multiple types of penalties may be assessed, including failure-to-file, failure-to-pay, failure-to-deposit, accuracy-related, and civil fraud penalties. If the IRS believes that claims were made in an attempt to commit tax evasion, or if a person is accused of purposely making false claims or filing false tax returns, they could face criminal charges.

Even though the voluntary disclosure program is no longer available, taxpayers can take steps to address issues related to erroneous ERC claims and meet their financial obligations. By cooperating with the IRS, an employer can make arrangements to repay the credits they received, and if necessary, payment plans may be set up to pay off the amount owed over time. Any unprocessed ERC claims can be withdrawn, including in situations where checks received from the IRS have not been cashed or deposited, and no interest or penalties will apply. An attorney with experience in tax law can help address concerns related to ERC claims, negotiate agreements with the IRS, determine whether penalties or interest may be reduced, and help avoid potential criminal charges or other legal issues.

Contact Our San Jose, CA Tax Lawyer

If you have received a letter from the IRS stating that you made an incorrect ERC claim, or if you are concerned that you may face penalties due to claims you have made, John D. Teter Law Offices can help you understand your legal options. Our San Jose tax law attorney can advise you on the best ways to resolve these issues while minimizing the amounts you may be required to pay to the IRS. Contact our firm at 408-866-1810 to arrange a consultation and get the legal help you need.