In October 2024, the IRS announced that it was focusing on processing approximately 400,000 taxpayer claims for the employee retention credit (ERC). Many businesses that claimed the pandemic-era credit are receiving long-awaited refunds as a result of this effort. However, the process is also generating a significant number of taxpayer notices that a claim for the credit has been denied in whole or in part or that some portion of a previously claimed credit must be repaid to the government.
Any taxpayer who receives a letter suggesting that all or part of their ERC claim is being denied, or that a previous refund related to the ERC must be repaid, should contact their tax advisor as quickly as possible. Each of these notices requires a thorough response, and many of these notices have a very short response period.
ERC claw-back letters have shortest response time
Many taxpayers who have already received ERC refunds are learning that receipt of a refund doesn’t necessarily mean they’re out of the woods. As part of the recent enforcement wave, the IRS has been issuing Letter 6577-C, instructing taxpayers to pay back some or all of a previous refund based on challenges to an ERC claim. Such letters have some of the shortest turnaround times in this group of ERC correspondence. Many of these letters demand an initial response within 20 days, so by the time the notices get through the mail and into the hands of a taxpayer, there could be as little as a week to 10 days to prepare a response.
The Letters 6577-C — often called “claw-back letters” — have been issued for various different reasons, so each one requires a tailored argument that’s responsive to the IRS’ concerns for that specific taxpayer. Some taxpayers may choose not to contest the IRS’ determination to claw back a portion of their ERC refund, but taxpayers who want to fight the determination must act quickly to preserve their rights to challenge the government’s assertions.
Other notices of adverse action also require quick response
In addition to efforts by the IRS to recover previously processed ERC refunds, the current wave of enforcement effort is generating thousands of notices that ERC claims have been partially or fully disallowed. Taxpayers may receive a Letter 106-C, which is a notice that their ERC claim has been partially denied. Taxpayers who receive such a notice have only 30 days from the date on the notice to file an appeal with the IRS Independent Office of Appeals. In order to be successful, an appeal of a Letter 106-C must include detailed arguments setting out why the taxpayer is entitled to the credit despite the IRS’ concerns, along with robust documentation to support the taxpayer’s reasoning.
Taxpayers may also receive a Letter 105-C, which notifies the taxpayer that their ERC claim has been fully disallowed. These notices include limited information on why the IRS has disallowed the claim, but the information in many of these notices is very general and may not be useful in guiding how a taxpayer should respond. Taxpayers who receive a Letter 105-C currently have up to two years to file an appeal with the IRS Independent Office of Appeals. Although taxpayers currently have a significant window of time to respond to Letters 105-C, this extended response window may be shortened in the future, and there can be some downsides to waiting to file an appeal. Taxpayers should consult with a trusted tax advisor and carefully weigh the pros and cons of delaying the filing of an appeal, including the impact this may have on timelines for other methods of challenging the IRS’ determination.
Importantly, the IRS expects taxpayers to submit appeals of Letters 105-C and 106-C that prove their entitlement to the credit by providing extensive documentation to justify their qualification for the ERC and their calculation of the credit amount they claimed. The IRS has published detailed instructions regarding the supporting documentation and arguments taxpayers must include in in their appeals to be successful. In many ways, the documentation taxpayers must provide in response to these notices is similar to the support they would need to compile in an IRS audit of their ERC claim, without the benefit of interaction with an IRS agent. As a result, compiling a successful appeal package in response to a Letter 105-C or 106-C can be a time-consuming and laborious process.
Swift action needed to protect ERC claims
The volume of ERC enforcement notices currently being issued creates unique challenges for taxpayers. Some of these notices include very short response times and require prompt and careful action. All of these notices can contain traps for the unwary, and securing advice from an experienced tax controversy practitioner can help spell the difference between success and failure. Most importantly, taxpayers who fail to respond to these notices within the prescribed deadlines will likely lose their credit. Taxpayers who receive any communication from the IRS about a claim for ERC should contact their tax advisors as quickly as possible to begin the preparation of an appropriate response.
