IRS starting to audit employee retention credit (ERC)

Some businesses that claimed the employee retention credit (ERC) have begun receiving IRS letters telling them their claims are on hold because they are under audit and must provide additional information to the agency. Several law firms and media outlets are reporting that some taxpayers who claimed the ERC began receiving IRS Letter 6612 (Audit Initiation Letter) in January.

The letters included Form 4564 (Information Document Request), asking the taxpayer to answer 13 multipart questions and provide the IRS with supporting documentation. The letters state that the IRS will not finish processing the taxpayer’s return until it has provided the required documentation. Failure to respond to the request will result in the denial of the taxpayer’s ERC claim.

The information requested on the Form 4564 includes the following:

• Documentation that the taxpayer fully or partially suspended operations due to a government shutdown
• Worksheets the taxpayer used when calculating the credit
• Documentation of the taxpayer’s gross receipts for the time period for which the ERC was claimed

If the IRS finds the documentation does not support the ERC credit amount claimed by the taxpayer, the IRS will issue an audit report detailing any changes it made. The letter states that the taxpayer may withdraw an ERC claim if they no longer believe they are eligible.

The audit letters appear to be separate from the round of 20,000 letters the IRS said it was issuing in January to notify taxpayers that their ERC claims had been disallowed. The IRS said the initial round of letters focused on entities that did not exist or did not pay employees during the eligibility period.

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