Frost Law
The Internal Revenue Service (“IRS” or “Service”) over the past year has begun sending out tremendous quantities of notices of disallowance for Employee Retention Credit (“ERC” or “Credit”) claims. The Service primarily sends out three different types of disallowances. These disallowances are often referred to by their corresponding number. Below I detail each one of these notices and what steps can be taken to address them.
This is by far the most common notice that the IRS is sending regarding ERC claims. The notice usually provides some basic information regarding the claim such as the amount of the Credit claimed, the name of the business, and the Employer Identification Number (“EIN”) for the business. The letter usually claims that the IRS cannot allow the claim for a refund because the Service does not believe the business was partially suspended due to governmental orders and/or the Service’s records do not indicate that the business met the required decline in gross receipts to claim the Credit on that basis of eligibility. A large percentage of these letters are disallowances for quarter 3 of 2021 ERC claims.
These contentions can serve as a source of frustration for business owners. First, the Service does not appear to have complete records of all governmental orders in place during the pandemic. Second, the records the Service has relative to gross receipts for business are annualized. Therefore, the Service has no way to determine what the quarter-by-quarter changes in a business’s gross receipts were in 2019, 2020, or 2021.
After receiving a notice of disallowance, a taxpayer has three options on how to address the notice:
A taxpayer always has the option to allow the notice of disallowance stand. The IRS will not process the amended tax return, and no refund will be issued. While it is unknown, failing to address the notice of disallowance may result in the IRS disallowing other claimed quarters on the basis that the taxpayer is signaling that they do not believe they are eligible for the Credit.
The most common response to a notice of disallowance is to protest the notice. Under normal circumstances, a taxpayer would have 30 days from the date on the notice of disallowance in which to draft and submit a formal written protest setting forth the arguments supporting eligibility for the Credit. The current 105C letters that taxpayers are receiving continue to request that they be responded to within 30 days; however, the IRS has indicated a willingness to accept protests that are filed after the traditional 30-day deadline.1
Once the protest is filed, the taxpayer waits to be contacted by the Independent Office of Appeals to defend their eligibility for the Credit. At this time, the IRS appears to be flooded with appeals related to notices of disallowance for ERC claims. Therefore, the wait time to hear from Appeals may be an extended period of time. Following a successful appeal, a taxpayer should expect to receive IRS letter 707C. This letter will detail the “overpayment” on the taxpayer’s account for the quarter at issue. Taxpayers, per the letter, should expect to receive a refund within four to eight weeks following receipt of the letter.
Taxpayers have a third option when responding to a notice of disallowance: sue the government. Taxpayers have two years from the date on the notice of disallowance during which they may file a suit for a refund in either the federal district court in which the business is situated or the Court of Federal Claims. It is important to recognize that filing a protest of a notice of disallowance does not toll the statute of limitations for a refund suit. Taxpayers can request, using IRS Form 907, an extension to the statute of limitations to file a refund suit if the taxpayer wishes to continue to challenge the notice through the Office of Appeals. The IRS is not required to extend the statute of limitations at the request of the taxpayer. Therefore, some individuals may be forced to file a refund suit should they wish to pursue their claims.
Another benefit of litigating a taxpayer’s ERC claims is the taxpayer could use this opportunity to bring finality to all their ERC claims. Any outstanding claims, so long as the claim was submitted to the IRS at least six months prior to commencing the suit, can be added to the lawsuit and a refund can be sought through that venue.
These letters are very similar to 105C letters. The major difference is a 106C letter is a partial disallowance of a claim. That is to say, the IRS has identified some issue with the claim which allows for a portion, but not all, of the claim to be refunded to the taxpayer. Usually, these letters are triggered when the IRS does not believe, based on information it has, that the taxpayer paid enough wages to support the amount of ERC claimed.
The options to address a 106C letter are essentially the same as the options to respond to a 105C letter. The only major difference is, if the taxpayer does nothing, the IRS will refund the portion of the Credit it determined the taxpayer was eligible to receive.
The 6577C letter, in most instances, is received by a taxpayer after they have already received a refund of their Credit. The letter proposes a change to the amount of the Credit already sent to the taxpayer. The letter typically states that the taxpayer did not have enough employees on payroll to equal the amount of the Credit. In other words, the Service believes that the taxpayer claimed more than the maximum possible Credit to which the taxpayer would be entitled. The major issue with the Service’s contention, again, is that it does not have all the information in its possession. The Service is basing the number of employees the taxpayer had on the number reported on the originally filed Form 941. This number of employees, however, is merely a snapshot of the number that the taxpayer had during one selected pay period. Therefore, this number does not account for employees who joined or left the taxpayer’s business during other points in the quarter.
The major difference with this letter is it comes with a due date at the beginning of the letter. This due date is normally 21 days from the date the letter was sent. This is an incredibly fast turnaround time; however, if the taxpayer has original payroll reports for the quarter in question, the response can be quickly put together. By providing the IRS with complete payroll data, the taxpayer can show the Service that they had enough employees to be eligible for the Credit they claimed.
If the taxpayer fails to respond to the letter, the Service will issue a notice of tax assessment demanding the return of what it has deemed as the overpayment of the Credit. Therefore, these letters should not be ignored and should be responded to promptly to avoid additional tax assessments and/or collections actions.
Receiving any one of these notices can be daunting and concerning to a taxpayer. There are proper ways to address these notices, and a tax professional can help you navigate which option might be best in any particular case. If you need assistance with responding to any of the above notices, don't hesitate to reach out to us at (410) 497-5947 or schedule a confidential consultation with our team of tax attorneys.
The Internal Revenue Service (“IRS” or “Service”) over the past year has begun sending out tremendous quantities of notices of disallowance for Employee Retention Credit (“ERC” or “Credit”) claims. The Service primarily sends out three different types of disallowances. These disallowances are often referred to by their corresponding number. Below I detail each one of these notices and what steps can be taken to address them.
This is by far the most common notice that the IRS is sending regarding ERC claims. The notice usually provides some basic information regarding the claim such as the amount of the Credit claimed, the name of the business, and the Employer Identification Number (“EIN”) for the business. The letter usually claims that the IRS cannot allow the claim for a refund because the Service does not believe the business was partially suspended due to governmental orders and/or the Service’s records do not indicate that the business met the required decline in gross receipts to claim the Credit on that basis of eligibility. A large percentage of these letters are disallowances for quarter 3 of 2021 ERC claims.
These contentions can serve as a source of frustration for business owners. First, the Service does not appear to have complete records of all governmental orders in place during the pandemic. Second, the records the Service has relative to gross receipts for business are annualized. Therefore, the Service has no way to determine what the quarter-by-quarter changes in a business’s gross receipts were in 2019, 2020, or 2021.
After receiving a notice of disallowance, a taxpayer has three options on how to address the notice:
A taxpayer always has the option to allow the notice of disallowance stand. The IRS will not process the amended tax return, and no refund will be issued. While it is unknown, failing to address the notice of disallowance may result in the IRS disallowing other claimed quarters on the basis that the taxpayer is signaling that they do not believe they are eligible for the Credit.
The most common response to a notice of disallowance is to protest the notice. Under normal circumstances, a taxpayer would have 30 days from the date on the notice of disallowance in which to draft and submit a formal written protest setting forth the arguments supporting eligibility for the Credit. The current 105C letters that taxpayers are receiving continue to request that they be responded to within 30 days; however, the IRS has indicated a willingness to accept protests that are filed after the traditional 30-day deadline.1
Once the protest is filed, the taxpayer waits to be contacted by the Independent Office of Appeals to defend their eligibility for the Credit. At this time, the IRS appears to be flooded with appeals related to notices of disallowance for ERC claims. Therefore, the wait time to hear from Appeals may be an extended period of time. Following a successful appeal, a taxpayer should expect to receive IRS letter 707C. This letter will detail the “overpayment” on the taxpayer’s account for the quarter at issue. Taxpayers, per the letter, should expect to receive a refund within four to eight weeks following receipt of the letter.
Taxpayers have a third option when responding to a notice of disallowance: sue the government. Taxpayers have two years from the date on the notice of disallowance during which they may file a suit for a refund in either the federal district court in which the business is situated or the Court of Federal Claims. It is important to recognize that filing a protest of a notice of disallowance does not toll the statute of limitations for a refund suit. Taxpayers can request, using IRS Form 907, an extension to the statute of limitations to file a refund suit if the taxpayer wishes to continue to challenge the notice through the Office of Appeals. The IRS is not required to extend the statute of limitations at the request of the taxpayer. Therefore, some individuals may be forced to file a refund suit should they wish to pursue their claims.
Another benefit of litigating a taxpayer’s ERC claims is the taxpayer could use this opportunity to bring finality to all their ERC claims. Any outstanding claims, so long as the claim was submitted to the IRS at least six months prior to commencing the suit, can be added to the lawsuit and a refund can be sought through that venue.
These letters are very similar to 105C letters. The major difference is a 106C letter is a partial disallowance of a claim. That is to say, the IRS has identified some issue with the claim which allows for a portion, but not all, of the claim to be refunded to the taxpayer. Usually, these letters are triggered when the IRS does not believe, based on information it has, that the taxpayer paid enough wages to support the amount of ERC claimed.
The options to address a 106C letter are essentially the same as the options to respond to a 105C letter. The only major difference is, if the taxpayer does nothing, the IRS will refund the portion of the Credit it determined the taxpayer was eligible to receive.
The 6577C letter, in most instances, is received by a taxpayer after they have already received a refund of their Credit. The letter proposes a change to the amount of the Credit already sent to the taxpayer. The letter typically states that the taxpayer did not have enough employees on payroll to equal the amount of the Credit. In other words, the Service believes that the taxpayer claimed more than the maximum possible Credit to which the taxpayer would be entitled. The major issue with the Service’s contention, again, is that it does not have all the information in its possession. The Service is basing the number of employees the taxpayer had on the number reported on the originally filed Form 941. This number of employees, however, is merely a snapshot of the number that the taxpayer had during one selected pay period. Therefore, this number does not account for employees who joined or left the taxpayer’s business during other points in the quarter.
The major difference with this letter is it comes with a due date at the beginning of the letter. This due date is normally 21 days from the date the letter was sent. This is an incredibly fast turnaround time; however, if the taxpayer has original payroll reports for the quarter in question, the response can be quickly put together. By providing the IRS with complete payroll data, the taxpayer can show the Service that they had enough employees to be eligible for the Credit they claimed.
If the taxpayer fails to respond to the letter, the Service will issue a notice of tax assessment demanding the return of what it has deemed as the overpayment of the Credit. Therefore, these letters should not be ignored and should be responded to promptly to avoid additional tax assessments and/or collections actions.
Receiving any one of these notices can be daunting and concerning to a taxpayer. There are proper ways to address these notices, and a tax professional can help you navigate which option might be best in any particular case. If you need assistance with responding to any of the above notices, don't hesitate to reach out to us at (410) 497-5947 or schedule a confidential consultation with our team of tax attorneys.
