What Are the Most Common Arguments to Disallow ERTC Claims? 

December 7, 2023
Dayes Law Firm

Has the IRS sent you a Notice of Claim Disallowance for your Employee Reduction Tax Credit (ERTC) application? This means the IRS is rejecting your tax credit claim because you do not meet one or several of the eligibility criteria. 

Understanding common IRS reasons to disallow ERTC claims can help determine whether your disallowance was in error. If it was, consult a tax attorney about appealing this decision. 

Reasons the IRS Disallows ERTC Claims

The IRS may have provided any of the following reasons for disallowing your ERTC claim. Note that these reasons may not be factual; they are just what the IRS presumes about your financial situation and eligibility. 

You Did Not Meet Criteria for Suspension of Operations 

Your business must meet several eligibility requirements to qualify for the Employee Retention Tax Credit. The first is that your business must have been subject to a governmental order during the pandemic that had a more-than-nominal impact on your business operations. 

It’s fair to say that most businesses had to change their operations in response to government orders, but your business doesn’t automatically qualify if it did. If you were able to alter your operations, such as by having your employees work from home, you may not meet the “more-than-nominal” threshold. 

You Did Not Experience a Significant Decline in Gross Receipts

Another important requirement for the ERTC is experiencing a significant decline in gross receipts. You’ll need to calculate your gross receipts for each quarter eligible for the ERTC, which includes all four quarters of 2020 and the first three quarters of 2021. (If you are a recovery startup business, you can also claim Q4 in 2021.) 

Then, you’ll need to compare these gross receipts to the equivalent quarter in 2019. The definition of a “significant decline” varies depending on the tax year. 

  • 2020: A significant gross receipts decline is 50% or more.
  • 2021: A significant decline is 20% or more.

You “Double Dipped” With Another Tax Credit 

Double dipping is one of the most common IRS reasons to disallow ERTC claims. If you have already claimed another tax credit or incentive for the same wages you claimed the ERTC for, the IRS will reject the ERTC claim.

For example, some businesses mistakenly claim the same wages they paid using PPP loans. Businesses often accidentally double dip with FFCRA paid family/sick leave credits as well. 

Because the ERTC is now a retroactive tax credit, it’s easy to forget which credits you applied when you initially filed your 2020 and 2021 tax returns. 

Your Claim Was Fraudulent 

The IRS commonly rejects fraudulent claims for the ERTC, and it may have also flagged your claim as fraudulent. Unfortunately, you may have fallen prey to an ERTC scam or read misinformation about this credit, causing you to claim it incorrectly or misunderstand your eligibility. 

Tax scams are incredibly common. The IRS has a “Dirty Dozen“ list of common tax scams that all businesses and individuals should be aware of when filing tax returns and claiming credits.

Scammers especially prey on the ERTC over other tax credits, falsely promising businesses an easy, generous eligibility process or touting unrealistic refunds.

The IRS advises working with certified tax professionals to ensure you fully understand your eligibility and avoid falling prey to misinformation. 

Consult Dayes Law Firm for Assistance With ERTC Disallowance

Whether you’re facing any of the above IRS reasons to disallow ERTC claims or another type of rejection, our tax attorneys can help you understand how to proceed. Give us a call at (800) 503-2000 or fill out our online form to schedule your free consultation.