IRS rejects 20,000 tax refund claims for worker retention credit score

IRS Commissioner Daniel Werfel speaks during an IRS event on August 2, 2023 in McLean, Virginia.

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The IRS is sending more than 20,000 rejection letters to taxpayers who wrongly claimed a pandemic-era tax break as the agency continues its crackdown on “dubious” filings.

Created to support small businesses during the Covid-19 pandemic, the employee retention credit, or ERC, is worth thousands of dollars per eligible employee. However, the tax break sparked a wave of companies pushing small businesses to wrongly claim the credit — and the agency temporarily stopped processing new filings in September amid a “surge of questionable claims.”

“With the aggressive marketing we saw with this credit, it’s not surprising that we’re seeing claims that clearly fall outside of the legal requirements,” IRS Commissioner Danny Werfel said in a statement Wednesday.

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Starting this week, ineligible taxpayers will start receiving copies of Letter 105 C for disallowed claims. Later this month, the IRS will unveil a “voluntary disclosure program” for taxpayers who wrongly claimed the credit. The agency is rejecting filings from entities that didn’t exist or didn’t have paid employees during the eligibility period.

“The action we are taking today is part of an initial set of steps in our compliance work in this area,” Werfel said. “More letters will be going out in the near future, including both disallowance letters and letters seeking the return of funds erroneously claimed and received.”

The announcement comes less than two months since the IRS unveiled a special withdrawal process for small businesses that wrongly claimed the credit to avoid repayment, interest and penalties.

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