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What to Do If You Receive an ERC Denial Letter from the IRS

Receiving a denial letter for the Employee Retention Credit (ERC) from the IRS can be stressful, but taking immediate and strategic action can help minimize potential financial consequences. 

Here are the steps you should follow to address the situation effectively.

1. File an Appeal Within 30 Days

The first and most urgent step is to file an appeal. The IRS provides only 30 days from the date on the denial letter to submit your appeal. Missing this window could result in waiving your rights to dispute the decision, so it’s critical to act quickly.

During the appeals process, you will need to gather all relevant documentation that supports your claim. This may include:

  • Payroll records
  • Evidence of business disruptions caused by government orders during the COVID-19 pandemic
  • Any correspondence or documentation used to support your original ERC claim

Consult with a tax attorney or CPA who specializes in ERC to ensure your appeal is as strong and comprehensive as possible.

2. Consider Amending Your Income Tax Return

If you determine that the denial was justified, or if you find errors in your original ERC filing, you may need to amend your income tax return. Here’s why this step is essential:

ERC Adjustments Impact Deductions:

When you initially claimed the ERC, you were required to reduce the amount of wages and payroll taxes reported as expenses on your income tax return. This is because the credit effectively reimbursed you for those expenses.

Double-Dipping Is Prohibited:

The IRS does not allow businesses to deduct wages and payroll taxes that were offset by the ERC credit. If your claim is denied and you were not entitled to the credit, those expenses can be added back to your return.

Potential Refund or Reduced Tax Balance:

Amending your return could result in a refund or at least reduce your tax liability. For example, if you report higher wages and payroll taxes as expenses, it may lower your taxable income and overall tax burden.

To determine the deadline for filing an amended return and assess the potential impact, consult with a tax professional. Acting promptly can ensure you remain compliant with IRS regulations while mitigating financial repercussions.

3. Establish a Payment Plan with the IRS

If the denial results in you owing money to the IRS, you may be eligible to set up a payment plan or installment agreement. This option can make the repayment process more manageable, especially for businesses facing cash flow challenges.

Here’s what you need to know about the process:

  • Form 433-B (Collection Information Statement for Businesses):
    To request an installment agreement, businesses must file Form 433-B, which provides a detailed financial overview, including:
    • Bank accounts and balances
    • Business assets (e.g., equipment, real estate, cryptocurrency)
    • Accounts receivable
    • Monthly income and expenses
  • The IRS uses this information to assess whether the business can pay the debt in full or requires a payment plan.
  • Installment Agreement Requirements:
    Businesses must demonstrate they lack the assets or income to pay the debt in full immediately. If approved, the IRS will allow payments over time, alleviating immediate financial strain.

Understanding ERC Eligibility

Before appealing a denial or amending your tax return, it’s crucial to verify whether your business met the ERC requirements. There are three key criteria for qualification:

  1. Qualified Employer:
    Your business must be considered a qualified employer under the ERC guidelines, which generally includes businesses affected by COVID-19.
  2. Qualified Wages:
    The wages must have been paid to W-2 employees, and the amounts must meet specific criteria outlined by the IRS.
  3. Impact of COVID-19:
    Your business must have been fully or partially suspended due to a government order, such as a state or local mandate limiting operations.

For example, in California, Governor Gavin Newsom issued executive orders restricting non-essential business activities. However, businesses classified as essential, such as those in construction, may not qualify unless they can prove a significant impact on their operations.

Common Reasons for ERC Denial

Understanding why your claim was denied can help you determine the best course of action. Common reasons for denial include:

  • Lack of evidence demonstrating significant business disruption
  • Misclassification of wages or employees
  • Errors in filing or documentation

If you suspect the denial was due to a misunderstanding or oversight, consulting a tax attorney can help clarify your eligibility and strengthen your appeal.

The Importance of Early Action

Delaying action after receiving an ERC denial letter can lead to compounded financial and legal issues. Taking proactive steps, such as filing an appeal, amending your tax return, or establishing a payment plan, can help you stay compliant and mitigate potential penalties.

How Milikowsky Tax Law Can Help

Navigating an ERC denial requires expertise and precision. At Milikowsky Tax Law, we specialize in helping businesses resolve complex tax issues, including ERC disputes. Our team can assist with:

  • Reviewing your ERC claim and IRS denial letter
  • Preparing and filing a comprehensive appeal
  • Identifying errors in your original filing and amending your tax return
  • Establishing payment plans and negotiating with the IRS

Final Thoughts

If you’ve received an ERC denial letter, don’t panic—but don’t wait, either. The steps you take now can significantly impact your financial future. Whether it’s filing an appeal, amending your return, or setting up a payment plan, addressing the issue promptly and strategically is essential.

For personalized guidance and expert support, contact Milikowsky Tax Law today. Our team is here to help you navigate the complexities of ERC disputes and safeguard your business’s financial health.

Need Assistance?

The IRS is actively auditing ERC claims, with over 300,000 requests currently under investigation. If you need help navigating an IRS audit of your ERC claim, contact John Milikowsky at Milikowsky Tax Law for expert guidance.