Since the inception of the Employee Retention Tax Credit ERTC, more than 3.6 million claims have been filed. Given the potential for companies to receive hundreds of thousands to millions of dollars in tax credits, the IRS has begun cracking down on fraudulent and suspicious claims to ensure that only eligible employers are receiving this financial windfall. 

In the early days of the ERTC, claim denials were virtually non-existent. Instead, the IRS would come back and investigate a suspicious claim by conducting an audit.

As of December 2023, however, the IRS has announced that it will begin denying some claims outright. This article outlines the criteria the IRS uses to deny a claim and how an ERTC tax attorney can help if your claim has been denied or audited.

IRS Challenges in Processing ERTC Claims 

When the ERTC was implemented, the IRS was inundated with so many claims that it eventually had to halt processing for several weeks until it could catch up with the volume. In particular, the IRS was concerned with the fact that businesses that were not eligible for the ERTC were filing claims (either erroneously or fraudulently). 

Further, businesses that were eligible often inflated their claims. Several reasons existed for inflated claims, ranging from innocent errors due to the complexity of the rules to willful violations committed by unscrupulous claims preparers. 

About ERTC Claim Denials 

Admittedly, the IRS will have to jump through several hoops to verify the size of an ERTC claim, and that’s why the audit process exists. Being audited is always a stressful experience, and the IRS is cracking down on inflated claims. The federal agency has not hesitated to file criminal charges in instances of egregious ERTC violations.

As you can imagine, an audit is an extreme measure, and the IRS has attempted to cut down on the number of audits it needs to perform by being more proactive. This has led to the IRS developing a list of criteria that allows it to deny a claim before dispersing funds and then having to go back and re-collect them. 

There are a couple of red flags that can lead to an immediate ERTC claim denial: 

  1. Your business did not exist during the eligibility period. Specifically, the ERTC provides a refund for qualified wages between March 13, 2020, and December 31, 2021 if a business’s operations were fully or partially suspended or gross revenue dropped by a specified threshold. If your business didn’t open its doors until after that time, you would not be eligible.
  2. You didn’t pay any employees during the qualifying period. Some businesses tried to get around the rules by classifying people as employees who are not eligible. This includes a sole proprietor claiming his salary as “employee” wages, or a business claiming that independent contractor compensation counts as wages. 

How an ERTC Tax Attorney Can Help Dispute an ERTC Claim Denial 

An ERTC claim denial is not the end of the world if you are legitimately eligible for the refund. Your ERTC tax attorney can review your claim against the current laws, identify any issues, and communicate with the tax authorities on your behalf. 

Contact Dayes Law Firm to Dispute a Denied ERTC Claim 

It can be difficult for small and medium businesses to navigate the complexities of ERTC rules while still claiming the maximum benefit. The stakes are high if you make a misstep. An audit and the resulting penalties can be prohibitively expensive, especially for businesses that are already facing financial hardships. 

If you are concerned about the IRS denying your ERTC claim or you have filed an ERTC claim that has been denied, contact Dayes Law Firm at 800.503.8000 for a free consultation.