Beware the ERC Clawback: IRS May Recapture Tens of Thousands of ERC Refunds
By Jeffrey M. Glassman on August 30, 2024
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Jeffrey M. Glassman
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On August 15, 2024, the IRS not only announced a second ERC Voluntary Disclosure Program (VDP), they also announced that this fall they would be mailing a large volume of letters (“up to 30,000”) reversing previously-paid ERC refunds. The IRS anticipates that the clawback notices—commonly referred to as “recapture letters”—could represent more than $1 billion in claims. Businesses receiving such IRS recapture letters will be ineligible for the new ERC VDP, which provides an incentive for businesses to move quickly if they wish to participate in the ERC VDP.
If a business receives a recapture letter, it means the IRS has determined that some or all of the business’s ERC refund was improper and the business is now required to repay the refund. It is likely that the business will not have an opportunity to participate in the pre-collection challenges to the recapture letter to determine whether the refund was in fact invalid. The amount due likely will include both penalties and interest, which could prove staggering depending on when the refund was paid (e.g., refunds paid years ago would have sizable interest accruals).
If a business does not pay the full amount due shortly after receiving a recapture letter, the IRS will likely refer the matter to its Collections department. Suffice it to say, publicly filed tax lien notices and notices of intent to levy assets are a very real possibility for these businesses. While liens and levy actions do regularly give rise to rights to challenge the proposed collection action administratively, and perhaps even in Tax Court, most businesses probably would prefer to not deal with a tax collection issue. Moreover, there is generally no legal right to challenge a tax lien notice until after it is filed (and even if the business were to win such a challenge, the lien notice will usually remain in the public record in addition to a document indicating the IRS has released or withdrawn the lien notice). There may still be options to pursue these matters in federal district court or the U.S. Court of Federal Claims, which for certain cases could prove worthwhile. But should businesses have to jump through these hoops before having the opportunity to discuss their ERC claims with the IRS?
In my personal opinion, the IRS’s approach here is troubling to say the least. Apart from the recapture letters—where the IRS previously issued refunds—the IRS is also denying ERC refunds that have not been issued, based on the IRS’s interpretation of what suffices for valid claims. There are many strong arguments that the IRS’s interpretation of the ERC laws are simply incorrect. With that in mind, sending businesses to IRS Collections who may have valid claims seems improper. Making the IRS’s approach even more troubling, the IRS’s legal authority to even issue recapture letters is not a certainty.
Regardless, given the current IRS landscape, if your business it at risk of receiving a recapture letter, applying quickly for the new ERC VDP—where you need to pay only 85% of the claim without any interest or penalties—could be a wise business decision.
If you have any questions about any ERC matter, or any other civil or criminal tax matter, please contact me at jglassman@meadowscollier.com or 214-749-2417.
If a business receives a recapture letter, it means the IRS has determined that some or all of the business’s ERC refund was improper and the business is now required to repay the refund. It is likely that the business will not have an opportunity to participate in the pre-collection challenges to the recapture letter to determine whether the refund was in fact invalid. The amount due likely will include both penalties and interest, which could prove staggering depending on when the refund was paid (e.g., refunds paid years ago would have sizable interest accruals).
If a business does not pay the full amount due shortly after receiving a recapture letter, the IRS will likely refer the matter to its Collections department. Suffice it to say, publicly filed tax lien notices and notices of intent to levy assets are a very real possibility for these businesses. While liens and levy actions do regularly give rise to rights to challenge the proposed collection action administratively, and perhaps even in Tax Court, most businesses probably would prefer to not deal with a tax collection issue. Moreover, there is generally no legal right to challenge a tax lien notice until after it is filed (and even if the business were to win such a challenge, the lien notice will usually remain in the public record in addition to a document indicating the IRS has released or withdrawn the lien notice). There may still be options to pursue these matters in federal district court or the U.S. Court of Federal Claims, which for certain cases could prove worthwhile. But should businesses have to jump through these hoops before having the opportunity to discuss their ERC claims with the IRS?
In my personal opinion, the IRS’s approach here is troubling to say the least. Apart from the recapture letters—where the IRS previously issued refunds—the IRS is also denying ERC refunds that have not been issued, based on the IRS’s interpretation of what suffices for valid claims. There are many strong arguments that the IRS’s interpretation of the ERC laws are simply incorrect. With that in mind, sending businesses to IRS Collections who may have valid claims seems improper. Making the IRS’s approach even more troubling, the IRS’s legal authority to even issue recapture letters is not a certainty.
Regardless, given the current IRS landscape, if your business it at risk of receiving a recapture letter, applying quickly for the new ERC VDP—where you need to pay only 85% of the claim without any interest or penalties—could be a wise business decision.
If you have any questions about any ERC matter, or any other civil or criminal tax matter, please contact me at jglassman@meadowscollier.com or 214-749-2417.
