Compliance Requirements under New York's Freelance Isn't Free Act

Taxpayers protesting an employee retention credit (ERC) denial should focus on providing the IRS with information regarding the period in dispute, despite the agency’s recent request for documents related to every quarter the credit was claimed, according to an agency official.

John McInelly, executive director of the IRS’s ERC program, noted that the agency is asking taxpayers to provide documents unrelated to the basis for denial of the credit only to reduce the amount of correspondence needed while it works to process the protest.

“Instead of doing the back-and-forth and back-and-forth on the initial reason for disallowance, we’re asking for respondents to provide information that substantiates the entirety of that claim,” McInelly said Sept. 25 at the American Bar Association Virtual Fall Tax Meeting.

The distinction appears to clarify a webpage published recently by the IRS that said taxpayers in disagreement with an ERC disallowance should provide documents supporting their eligibility for each quarter the credit was claimed.

The page also specified that taxpayers have two years to appeal a denial, up from the typical 30-day administrative deadline.

The agency sent nearly 30,000 denial letters over the summer for claims that it said showed a high risk of being improper. Taxpayers claiming the ERC, which was created to help employers pay their workers during the COVID-19 pandemic, need to meet complex eligibility requirements, including a gross receipts test showing a significant decline in receipts during the period for which the credit is available.

McInelly stopped short of providing specific instructions for taxpayers that have already filed an appeal, but he said they should “have the documentation ready.”

“In the disallowance arena, we’re trying to make things as efficient as possible, because all of this is kind of uncharted waters as far as the number of claims that are being disallowed,” McInelly said.

McInelly also said the IRS has been working on guidance addressing the income tax implications of the ERC as more claims begin to be approved or denied. However, the agency doesn’t expect to issue more guidance on eligibility for the credit, he said.

Absent any legislation modifying the statute of limitations for the ERC, the IRS has until April 15, 2025, to assess claims filed for the first two quarters of 2021 and until April 15, 2027, for the third and fourth quarters of 2021.

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