IRS Rapidly Increasing ERC Examinations by Sending Letter 6612 to Employers

The Internal Revenue Service (“IRS”) has recently begun a large-scale examination campaign of Employee Retention Credit (“ERC”) claims amidst a moratorium on processing new claims and the introduction of the ERC Voluntary Disclosure Program and ERC withdrawal program.

Letter 6612

In the latest wave of ERC audit measures, the IRS has begun mailing Letter 6612 to employers whose ERC refund claims are still pending in an attempt to weed out ineligible claims. The examination, performed by correspondence only, requires the employer to submit a long list of documentation within a short time frame—only 30 days from the date the IRS mails the letter. If an employer fails to meet the deadline or asks for an extension, the IRS will disallow the ERC claim in full. 

The Form 4564, captioned as an Information Document Request (“IDR”) and included with the Letter 6612 requires employers to submit documentation for every quarter for which ERC was claimed, such as:

• For any quarter claimed under the full-or-partial suspension test, documentation showing that business operations were fully or partially suspended due to governmental orders, including:
  • Applicable governmental orders with specific provisions highlighted
  • Written explanation of how each governmental order either suspended a more than nominal portion of business operations or had a more than nominal effect on business activities
  • Contemporaneous business records that demonstrate the full or partial suspension, such as meeting minutes, correspondence to employees, customers, or vendors
• For any quarter claimed under the gross receipts test, documentation supporting the required decline in gross receipts, a written explanation of how eligibility was determined, and how the aggregation rules under §448 and §414(m) were applied.
• Documentation showing that ERC was not claimed for wages taken into account for other COVID-19 relief programs, such as the Paycheck Protection Program (“PPP”), the Shuttered Venue Operators Grant (“SVOG”), Restaurant Revitalization Fund (“RRF”), for paid sick and family leave credits under the Families First Coronavirus Response Act (“FFCRA”), or any other payroll tax credits
• Documentation relating to PPP loans received, including:
  
  • Application for PPP loan forgiveness (Form 3508);
  • PPP loan forgiveness letter received from lender or SBA;
  • Information regarding the PPP covered period, PPP loan disbursement amount, total PPP reported payroll costs during the covered period, and total wages during the covered period;
• Copies of income tax returns, employment tax returns, and Forms W-2. If the employer is part of an aggregated or affiliated group, the returns for each member of the group must be submitted.
• Copy of the amended income tax return showing the entity reduced the amount of claimed wage expense by the amount of ERC;
• For employers with more than 100 full-time employees in 2019 who claimed ERC for 2020 quarters, documentation showing ERC was claimed solely for wages paid to employees who were not performing services;
• For employers with more than 500 full-time employees in 2019 who claimed ERC for 2021 quarters, documentation showing ERC was claimed solely for wages paid to employees who were not performing services;
• For any ERC claim relating to wages paid to employees related to majority owners, identification of the employees and their relationship to the majority owner. This includes employees related to persons deemed to be majority owners under attribution rules under §267(c) of the Internal Revenue Code.

Conclusion

If the employer doesn’t respond within the tight 30-day timeframe, the IRS will disallow the entire ERC claim and send the employer a notice of disallowance by certified or registered mail. When the IRS formally disallows a refund claim, the taxpayer is forced to either file a lawsuit in federal court to litigate the issue or may be permitted to first file a protest with the IRS Office of Appeals. Either situation subjects employers to the complex and deadline-driven web of refund claim controversies and further delays the much-needed relief promised by Congress.  

Employers who have received Letter 6612 or other notification of an IRS audit must act quickly to defend their ERC refund claim. Frost Law attorneys have significant experience in tax controversy matters, ERC eligibility analysis, and overall compliance. If you need assistance defending your ERC claim in an examination, don't hesitate to reach out to us at (410) 762-4097 or schedule a confidential consultation.