The IRS announced in June that it was entering the next stage of Employee Retention Credit (ERC) work and that following a review of submitted claims, it plans to deny tens of thousands of improper high-risk, “erroneous” ERC claims while starting a new round of processing lower-risk claims to help eligible taxpayers.
The announcement stated that, “the review involved months of digitizing information and analyzing data since last September to assess a group of more than 1 million [ERC] claims representing more than $86 billion filed amid aggressive marketing last year.”
“…the IRS identified between 10% and 20% of claims fall into what the agency has determined to be the highest-risk group, which show clear signs of being erroneous claims for the pandemic-era credit. Tens of thousands of these will be denied in the weeks ahead.”
Now that the notices have gone out, taxpayers may be wondering what a notice of claim disallowance is and what to do next. Here’s a quick explanation of the significance of these notices, and how taxpayers can respond.
The notice of claim disallowance is a legal notice that the IRS is not allowing the credit or refund claimed. A letter 105C is a notice of a full disallowance, and a 106C is a notice of a partial disallowance. If taxpayers don’t agree with the IRS’s denial of the claim – regardless of which letter the taxpayer received – they can seek review by petitioning the IRS’s Independent Office of Appeals (Appeals).
It is important to remember that you have rights as a taxpayer. This includes the right to appeal an IRS decision in an independent forum which lets you challenge the notice in U.S. District Court or the U.S. Court of Federal Claims. Taxpayers have this right regardless of whether the notice included information informing the taxpayer of the right or how to pursue such a remedy.
Taxpayers who challenge the notice in court must generally file suit within two years from the date the notice of claim disallowance was mailed (that date is typically on the top righthand side of the first page of the notice).
Unfortunately, the IRS has stated that some in the recent batch of notices of claim disallowance contained errors or omissions, including the omission of Appeals information.
The IRS released a news announcement on August 9, 2024 stating:
“The IRS learned that some of the recent early mailings have inadvertently omitted a paragraph highlighting the process for filing an appeal to the IRS or district court, and the agency is taking steps to ensure this language is mailed to all relevant taxpayers. Regardless of the language in the notice, the IRS emphasizes taxpayers have administrative appeals rights available to them…”
Despite the IRS’s omission of the Appeals paragraphs in some of the notices of claim disallowance, taxpayers should be aware that they always have the right to challenge the denial in Appeals, and they can petition Appeals at anytime within two-years from the date found on the top righthand side of the first page of the notice. However, generally, once the two-year window has expired, taxpayers will not be entitled to a refund even if they are still working with Appeals, because any issuance of a refund or application of a credit by the IRS beyond this period is considered erroneous under IRC § 6514. Taxpayers can avoid this statutory limitation by reaching an agreement with the IRS to extend the time to file suit on a Form 907, Agreement to Extend the Time to Bring Suit by filing a timely suit in the appropriate United States District Court or the Court of Federal Claims prior to the expiration of time to do so.
You can generally resolve most notices or letters without help, but you can also get the help of a professional – either the person who prepared your return, or another tax professional.
If your IRS problem is causing you financial hardship, see Can TAS help me with my tax issue?
Resources:
- NTA Blog: Did You Receive a Notice of Claim Disallowance for Your Employee Retention Credit Refund Claim? If So, Now What?
- NTA Blog: Notice of Claim Disallowance: Don’t Make This Mistake
- Employee Retention Credit
- ERC Eligibility Checklist
- 7 warning signs ERC claims may be incorrect
- Frequently asked questions about the Employee Retention Credit