The IRS has Disallowed Your ERC, Now What?

The IRS has sent you a letter indicating it disallowed your employee retention credit claim. Whether or not the IRS’s letter informs you of it, you have the right to appeal the IRS’s determination. You may appeal by filing a formal protest, or you may file a refund suit. I have explained the process for filing a refund suit, so this blog is limited to the process of filing a formal protest. 

As an initial matter, before you file a protest you must first have a basis to do so. Hopefully, the advisor with whom you worked in claiming the ERC has a readily available audit file that substantiates the basis for the ERC claim that you can rely on in drafting your protest. For example, the audit file should contain financial documentation to provide the business’ gross receipts declined by more than 50% or 20%, as the case may be, if you claimed the ERC based on the gross receipts test. Or, if the ERC was claimed due to the full or partial suspension test, the audit file should contain the government orders that were relied upon in claiming the ERC and documentation (e.g., emails or written policies) that the government orders did cause a full or partial suspension. If you do not have a readily available audit file, time is of the essence and you should work with a trusted advisor to ensure you do, in fact, qualify for the ERC.

Assuming your business has a basis for claiming the ERC, your protest should include the following:

For the ERC this would be the quarter(s) and year the IRS disallowed the claim. The disallowed items would be the employee retention credit (assuming the IRS disallowed the entirety of each period). For the reason you don’t agree, you can in a simple manner, explain that your business qualifies under one of the “tests.” (i.e., gross receipts test, partial suspension test, recovery start-up business).

The detailed statement can be taken from the audit file that your advisor has readily available. You should attach to the protest any substantiation to support those facts. For example, if you claimed the ERC under the partial suspension test, you should attach government orders to the protest and business documents to substantiate your business was partially suspended as a result of the government orders. 

Here again, your advisor should have readily available the law or authority that supports the ERC claim. If not, they should be able to provide it to you within a reasonable time.

One thing to note, the IRS’s denial letters and the Notices upon which they are based often do not comport with the plain language of the statute. The Notices often improperly narrow the broadly written statute (26 U.S.C. § 3134). For example, IRS Notice 2021-20 states that government orders must be in “in effect during” a quarter in order for a taxpayer to have a partial suspension of operations. See Notice 2021-20 Q&A 22 and Example. However, the language of 26 U.S.C. § 3134 is much broader and only requires “the operation of the trade or business [be] partially suspended during the calendar quarter due to orders from an appropriate governmental . . . .”  (emphasis added) That is, the partial suspension during a calendar quarter can be as a result of a government order that has already expired—the partial suspension must simply be “due to” a government order. When identifying the law or authority that supports you position, ensure you are properly citing authority. 

You should provide the foregoing information within 30 days the date on the disallowance letter.

Hopefully, your ERC advisor has an audit file that is readily available so the protest can be quickly and easily drafted. If you are missing information, your advisor has “gone missing,” or you have questions about the protest process, contact Dickinson Bradshaw’s ERC team.