IRS Seeks Evidence From Businesses That Claimed Covid Tax Break

The IRS is quietly piloting a new approach to verifying employee retention tax credit claims by sending documentation requests to taxpayers, leaving businesses scrambling to prove they deserve the credit.

Businesses in January received what’s called Letter 6612 alerting them that their pandemic-era claim is under audit and on hold. The letters are accompanied by Form 4564 requiring the taxpayer to provide detailed documentation for 13 multi-part questions within about a month of receiving the letter, according to one of the letters obtained by Bloomberg Tax

“Three weeks is not a lot of time to get that information together for a small business,” said Daniel Strickland, partner at Holland and Knight LLP. “Often, small businesses are short-staffed in the administration function. They don’t just have a folder of ERC substantiation sitting around.”

The IRS is going full steam ahead on efforts to go after fraudulent and overstated claims on the ERC credit, which was created to help struggling businesses keep employees on the payroll during the pandemic. This recent push for more information is seen as an attempt by the IRS to weed out businesses that may not be eligible for or may not have sufficient documentation for the credit while not requiring an extensive amount of upfront IRS manpower.

The IRS didn’t immediately respond to request for comment on the letters or the extent of the mailings.

While the scope of the program is unclear, it appears all types of businesses are receiving the letters. Practitioners said only a fraction of their clients who claimed the ERC received a letter.

“It’s really all over the board.” said Justin Elanjian, a managing director at Stout, on the types of clients that are getting the requests. “It’s different industries, it’s different jurisdictions, it’s different time periods.”

Elanjian noted that the majority of the letters he’s seen are for clients with smaller claims.

Supporting a Claim

The letters are one of several steps the IRS has been taking in recent months to curb improper ERC claims. The IRS last year paused the processing of new ERC claims and offered withdrawal and voluntary disclosure options for businesses that want to backpedal their claim or pay back part of the credit for which they didn’t qualify. The agency, as of Dec. 21, sent over 40,000 letters since the start of the agency’s intensified efforts, telling taxpayers their claim didn’t meet the basic requirements to get the credit or that the IRS will recapture their excessive claims.

In the recent information requests, the IRS asks a range of questions that help prove to the agency the taxpayer is eligible for the credit they claimed. The requests include documentation to support that the businesses operations were fully or partially suspended because of a government order to close, copies of worksheets used to calculate the credit, and documentation on gross receipts. The forms don’t list the name of the examiner.

If the taxpayer submits all the documentation and it supports the eligibility and amount for the credit, the IRS will finish processing the return. But if the documentation doesn’t support its eligibility then the IRS will send an audit report with changes. If a business doesn’t respond, it won’t get a refund, John McInelly, an IRS executive overseeing the ERC program, said in the Letter 6612.

Employers are also given the option to withdraw the claim if after receiving the letter they determine they aren’t entitled to the credit, the information request said. The IRS in October 2023 first offered a withdrawal option for taxpayers who want to take back potentially inaccurate employee retention tax credit claims to avoid future repayment, interest, and penalties.

IRS Commissioner Danny Werfel told House Ways and Means lawmakers last week that the IRS is processing about 1,000 to 2,000 claims a week and has paid out about $1 billion of the claims.