How to Appeal an ERC Claim Denied by IRS

With more than a decade of legal, business, and tax experience, the team at Milikowsky Tax Law is on hand to help defend your business in cases of Employee Retention Tax Credit (ERC) audits.

IRS is scrutinizing Employee Retention Tax Credit Recipients, will your filing hold up?

If you received a letter from IRS disallowing your Employer Retention Credit refund claim within the last 30 days, the clock is ticking.  You have 30 days to respond and file your IRS Appeal.  The timeline to file your Appeal is inflexible. Once your initial 30-day period expires, you may lose your rights to Appeal.  IRS may then send you a denial letter and you may then be required to file a lawsuit in U.S. District Court or U.S. Federal Court of Claims.

We strongly recommend you contact a qualified tax attorney to represent your company in the IRS appeal process. Only your communication with an attorney is protected by the attorney-client privilege.  There is a statute of limitations to file and receive a refund.  Contact an attorney to ensure your rights are protected.

Preparing for an ERC Audit

To effectively prepare for an ERC audit, consider the following steps:

  • Maintain Accurate Records: Keep detailed documentation of all financial transactions, including payroll records, government orders affecting operations, and any communications related to business disruptions during the pandemic.
  • Review ERC Eligibility Criteria: Ensure your business meets the specific requirements for ERC eligibility, including qualified wages and the impact of government-mandated suspensions.
  • Avoid Common Pitfalls: Be aware of the red flags that can trigger an audit and take proactive measures to address them.

Contact Us Today

If you’ve received an IRS audit notice regarding your ERC claim, don’t navigate this challenging process alone. Contact Milikowsky Tax Law today to schedule a consultation. Our experienced tax attorneys are here to defend your business and provide the guidance you need during an ERC audit.

STEPS YOU MUST TAKE TO APPEAL YOUR IRS ERC REFUND DISALLOWANCE

Review the IRS Letter denying your ERC refund claim.
Typical letters from IRS will be a “Letter 105C” or “Letter 106C.” However, IRS may send other letters or Notices that deny your ERC refund claim.

Identify the reasons WHY IRS denied your ERC claim.
There are 3 essential requirements to qualify for an ERC refund: i) your business must be an “eligible employer”; ii) you have “qualified” wages; and iii) your business was affected by COVID (fully or partially suspended due to a federal, state, or local government order). There are other requirements and issues that may arise in your situation.

Include your documents and facts that identify and resolve the issues you are raising in your “Protest Letter.”
Present evidence that your business satisfied each of these requirements. There are other requirements that must be satisfied; however, these are the most common issues.

Confirm your deadline to appeal the IRS’ decision.
You have 30 days from the date on the IRS Notice to file a “Protest Letter.” Read your IRS letter or notice carefully. If IRS has already denied your ERC claim, you may be required to file a lawsuit in U.S. District Court or U.S. Federal Court of Claims. There is a statute of limitations to file a lawsuit. Consult with a qualified tax attorney to confirm your deadline.

Draft your Protest Letter:
For most formal appeals, you need a structured written protest that outlines the facts, tax law, and your position. You should include documents supporting your position.

How to Draft an IRS ERC Refund Disallowance Protest Letter

Minimum information to include (this is not a complete list but a general summary for information purposes only and is not intended to be legal advice. Consult with an attorney to protect your legal rights):

  1. Personal/business information (your name, business name, address, and business EIN).
  2. A description and summary of your trade or business operations.
  3. Identify the IRS’ Letter that you are responding to. Reference the Letter Number at the bottom right corner of the IRS Notice and date of the IRS Notice.
  4. Include a statement that you are requesting to Appeal IRS’ decision.
  5. Include specific and detailed facts and documents supporting why you disagree with IRS’ position. You may have multiple issues to address. Consult with a qualified tax attorney to identify all issues that need to be addressed. You may also need to produce your worksheets used to compute the ERC.
  6. Include in your letter all applicable laws, regulations, and IRS guidance that support your eligibility.
  7. Include a copy of the IRS’ Notice disallowing your ERC Claim.
  8. You must sign under penalty of perjury and include a statement. Please refer to IRS publication 5 for more information.

Mail the Protest Letter to IRS via first class, certified mail to the address on the notice. However, please read the IRS notice carefully and follow the instructions provided in the letter.

Common Triggers for ERC Audits

Several factors can raise red flags with the IRS, potentially triggering an audit:

  1. Essential Businesses Operating During COVID-19: If your business was deemed essential and continued operations without a significant decline in revenue, the IRS may question your ERC eligibility. It’s crucial to provide evidence of how COVID-19 impacted your operations.
  2. Inability to Prove Government-Mandated Suspension: Businesses must demonstrate that a government order directly affected their operations. Without solid evidence, such as canceled contracts or official mandates, the IRS may scrutinize your claim.
  3. Including Family Member Wages: Wages paid to family members of a majority owner should be excluded from the ERC calculation. Including these can raise concerns during an audit.
  4. Using Wages for PPP Loan Forgiveness: Wages already used for Paycheck Protection Program (PPP) loan forgiveness cannot be used again for the ERC. The IRS prohibits double-dipping, so it’s essential to ensure no overlap in wage claims.
  5. Claiming Ineligible Quarters: Your business may not qualify for the ERC in all quarters. The IRS requires careful review of each quarter to determine eligibility.
  6. Non-Qualifying Government Orders: Voluntary business suspensions without a government order do not qualify for the ERC. Ensure your suspension aligns with official mandates to support your claim.
  7. Wages Not Subject to FICA: To qualify, wages must be subject to FICA (Medicare and Social Security) taxes. Including wages not subject to these taxes can lead to audit issues.
  8. Including Too Many Tax Periods: Some businesses can only claim the ERC for wages paid during the suspension period, not the entire quarter. Ensure your claim accurately reflects eligible periods.
  9. Non-Existent Businesses or Fraudulent Claims: If your business did not exist during the eligibility period or you did not pay wages, the IRS will view this as fraud. Accurate and truthful reporting is crucial to avoid severe penalties.

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How Milikowsky Tax Law Can Assist Your Business in Case of an ERTC Audit

Facing an ERC audit requires experienced legal representation. At Milikowsky Tax Law, we offer comprehensive audit defense services, including:

  • Expert Analysis: We thoroughly review your ERC claims and supporting documentation to identify potential issues before the IRS does.
  • Strategic Representation: Our team communicates directly with IRS agents on your behalf, ensuring your rights are protected throughout the audit process.
  • Proactive Compliance Guidance: We provide advice on maintaining compliance and minimizing the risk of future audits.

The information provided is only general information and is not intended to be legal advice and is not protected by the attorney-client privilege.  Please contact a qualified tax attorney to ensure your rights are protected.  There may be additional items to include, issues to address, and other requirements. The issues pertaining to your ERC disallowance may be complex and involve multiple issues.  

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