ERC Clawbacks: Strategic Defense Against IRS Employee Retention Credit Audits
Thousands of small and mid-sized business owners who claimed the Employee Retention Credit (ERC) during the pandemic are now receiving aggressive audit notices, disallowance letters (Letter 105-C), and demands for full repayment.
The IRS has deployed specialized enforcement teams to audit ERC claims, specifically targeting businesses that relied on third-party “ERC mills” that improperly calculated eligibility, ignored government order requirements, or misapplied gross receipts tests. If your business is under an ERC audit, you face the clawback of the entire credit, plus compounding interest and a 20% accuracy-related penalty.
Key Elements of an ERC Audit Defense
IRS Audit Requirement | What Your Defense Must Prove |
Government Order Suspension Test | You must provide specific, dated government orders (local, state, or federal) that directly forced a full or partial suspension of your business operations. |
Gross Receipts Reduction Test | You must provide quarter-by-quarter financial records proving a qualifying drop in gross receipts compared to the corresponding 2019 quarters. |
Qualified Wages & Healthcare Calculation | You must prove that wages used for ERC were not also claimed for Paycheck Protection Program (PPP) loan forgiveness (preventing “double dipping”). |
Navigating an Active ERC Disallowance or Audit
If the IRS challenges your claim, ignoring the inquiry will result in an automatic assessment and immediate collection action.
- Audit Response (Form 4564 IDRs): We assemble an airtight defense binder containing the exact legal orders, payroll journals, and financial reconciliations required by IRS auditors when responding to Information Document Requests (Form 4564).
- Appeals Representation: If your ERC claim was improperly disallowed, we file a formal protest with the IRS Independent Office of Appeals within the 30-day administrative window. This protects your 2-year statutory right to litigate under IRC § 6532. The 2-year clock starts ticking the day the IRS mails Letter 105-C. Since the IRS is working through a substantial backlog, filing Form 907 before those 2 years elapse can extend that clock once the IRS countersigns.
- ERC Penalty Abatement: If an improper claim was made due to reliance on erroneous advice from a tax promoter, we petition for the removal of negligence and accuracy penalties based on reasonable cause.
- Specialized Claim Withdrawal: If your claim is still processing or unpaid and you suspect promoter error, we utilize the IRS Claim Withdrawal process to cancel the claim and eliminate civil penalties before an audit escalates.
If you’re facing problems with IRS ERC audits or clawbacks, contact a professional and get help today.