You Got a Letter 105C Refund Denial for ERC – Now What?
Has your business received an Employee Retention Credit (ERC) refund denial letter from the Internal Revenue Service (IRS)? Last month, the IRS began issuing ERC denial letters for the 2021 tax year to address the reported tens of thousands risky and/or erroneous refund claims. While cracking down on fraudulent and improper claims is very much needed, there are concerns about Letter 105C notices for ERC. One particular concern is that unlike traditional IRS notices or questions about a tax return, these Letter 105C notices are not a notification of examination, which would allow taxpayers the opportunity to substantiate their claim. Letter 105C notices are rather a denial of the claim with short and limited response options. To better understand why this is problematic for all legitimately filed ERC claims, let’s walk through an overview of the ERC filing process.
ERC Background and Filing Process
ERC is filed using Form 941X for an amended employment tax return. Businesses are required to input the corrected, originally reported or previously corrected amounts, and change amounts for the following:
– Line 18a. Nonrefundable portion of ERC
– Line 26a. Refundable portion of ERC
– Line 30. Qualified wages for ERC
– Line 31a. Qualified health plan expenses for ERC
– Line 43. Detailed explanation of how corrections were determined
There are also a few certification options to designate on Line 5 for how withholdings will be handled. However, Form 941X does not require the business to indicate how they are eligible for ERC (either due to quarterly decline in gross receipts or partial/full shutdown due to government orders). Additionally, no supporting documentation is required with the amended Form 941X. As a result, the IRS is unaware which eligibility method was actually used to file for ERC without an examination of the amended return.
What is a Letter 105C?
Letters 105C are refund claim denial letters informing taxpayers that their refund has been disallowed. The letter may state that based on a review of IRS records, it is determined you are not an Eligible Employer for purposes of the ERC. The letters may go on to state that only employers who experienced a full or partial suspension of operations due to a government order or experienced the required decline in gross receipts are considered Eligible Employers. Taxpayers are given the right to appeal the decision by representing themselves before appeals or obtain assistance from an authorized representative. Taxpayers have 30 days from the date of the letter to respond, or the IRS will proceed with the denial.
These denial letters appear quite presumptive, considering the IRS would not have knowledge of which eligibility method was used to file the ERC claim. If assessing gross receipts decline, the IRS has the amount of annual gross receipts reported by the business; however, ERC eligibility is not measured by annual gross receipts, but rather on quarterly receipts. Quarterly gross receipts are not required to be reported during the ERC filing process, so it is unclear how the IRS can definitively deny ERC claims without a thorough examination process. Furthermore, assessing partial or full shutdown due to government orders should require a formal request from the IRS to provide the specific government orders from their city, state or federal government that is applicable to their business operations.
The over-arching use of these denial letters can be unnecessarily stressful to taxpayers who legitimately experienced a quarterly decline or shutdown of business operations. The short 30-day response timeline is also alarming considering the IRS’s unconscionably long delays in processing ERC claims coupled with the widespread delays with mail delivery. Considering the IRS did not incorporate eligibility questions on Form 941X, an Information Document Request (IDR) should have been issued to taxpayers providing a reasonable opportunity to provide the specific information needed to validate the ERC claim instead of automatic denial letters.
What Should I Do if I Receive a Letter 105C?
Business owners with legitimate ERC claims should act quickly and not throw in the towel just yet – these letters do not automatically mean you have to toss out the expectation of receiving your ERC refund. However, it does mean you should retrieve your supporting documentation to demonstrate and support your claim. Then, you should schedule a meeting with your trusted advisor to sufficiently review your claim and submit your appeal to the Office of Appeals.
Windham Brannon is well-versed in helping taxpayers understand their ERC eligibility and credit calculations, as well as acting as your support when addressing tax controversy issues with the IRS. If you have received a Letter 105C, contact Tomika Bullet, Principal and Tax Controversy Practice Leader.
