If you’ve received IRS Notice 6612, the IRS is taking a second look at your ERC claim(s). If you want to keep the credit, you must respond promptly to back up the information reported on your payroll return.
The Employee Retention Credit (ERC) offered significant savings to employers who continued to pay their employees during the COVID-19 pandemic, even though they were experiencing reduced sales and/or restrictions on their business operations. Unfortunately, however, many businesses incorrectly claimed this credit, and the IRS is auditing payroll returns with ERCs at very high rates.
To keep you informed, this post explains what the 6612 notice means, how to respond, and what to expect if the IRS disallows your credit. The IRS has been warning taxpayers about the risks of ERC claims for over two years, and now, the agency is taking action. To get help now, contact us at Wiggam Law today.
What Is IRS Notice 6612?
IRS Notice 6612 means that the IRS is auditing the employee retention credit claimed on your payroll tax returns from 2020 and/or 2021.
If you have not received the credit, the IRS will hold it until the audit is complete. The notice includes Form 4564 (Information Document Request), which outlines the documents the auditor wants to see. Start gathering information as soon as possible. You only have 30 days to respond to this notice, and if you don’t respond in that time frame, the IRS may automatically disallow the credit(s).
Documentation Required to Support Your ERC Claim
The documents you need to provide vary based on why you claimed the Employee Retention Credit and other factors identified by the auditor. Review the IDR carefully to see which documents the auditor wants to see. Here are the types of documents they are likely to request in different scenarios:
- Credits claimed due to a full or partial suspension of operations:
- Government orders with the specific provision highlighted – for example, a copy of your state health department’s requirement to close restaurants or only serve take-out.
- Written explanation of how the government orders affected your business activities – for example, your bar had to shut down several hours earlier than usual, or you couldn’t open your retail store to customers.
- Business records related to the suspension – for example, emails sent to employees or minutes from business meetings.
- Credits claimed due to a reduction in revenue.
- Documentation showing the reduction in revenue – for example, sales records from the quarter the credit was claimed and the same quarter in 2019 or the prior quarter if using the alternative method.
- A written explanation of how you determined eligibility.
- Proof that the ERC was not claimed on wages that were covered by other relief programs such as the Paycheck Protection Program, the Shuttered Venue Operators Grant, paid sick and family leave credits under the Families First Coronavirus Response Act, etc – for example, if you received a PPP loan, you will need the loan amount, the reported payroll costs, the total wages paid during the covered period, and the loan forgiveness letter.
- Business income tax returns (Schedule C, Form 1065, Form 1120-C or S, etc)
- Copies of amended income tax returns show that you correctly reduced your wage expense. Note this only comes into play if you claimed the ERC retroactively. If you claimed the ERC before filing your business income tax return, your wages expense should reflect that.
- Employment tax returns (Forms 941 or 941-X)
- W-2 forms issued to your employees.
- For employers with over 100 full-time employees in 2019 who claimed the ERC in 2020:
- Documentation showing that the ERC was only claimed on wages paid to employees who were not performing services – for example, correspondence with your employees showing that they were getting paid even though they were not working.
- For employers with over 500 full-time employees in 2019 who claimed the ERC in 2021:
- Documentation showing the ERC was only claimed on wages paid to employees who were not providing services.
- Details about employees related to the majority owners.
If you receive a questionnaire with your notice, review all the questions carefully to ensure that your documents address the auditor’s concerns. Failure to provide the correct documentation may put you at risk of losing this credit.
Step-by-Step Tips: How to Respond to Notice 6612
Here is what you should do when you receive this notice:
- Review the request carefully – If you are unsure what the letter means, contact the IRS directly or contact a tax attorney with experience with ERC claims to help you.
- Contact the company that prepared your ERC claim – If your accountant or payroll services provider prepared the claim, reach out to them to get supporting documents. If you worked with an ERC mill, there is a high chance they claimed the credit incorrectly, and in this situation, you should reach out to a tax resolution professional instead.
- Gather your documents – Whether you filed your own returns or paid a professional, gather all the documents listed on the IDR and any others that substantiate your claims.
- Request an extension if needed – Contact the IRS using the information on the notice to request an extension. As long as you reach out by the deadline, you can usually get one 30-day extension.
- Submit the documents to the IRS – Fax or mail the documents as requested in the IDR and follow up to make sure that the IRS receives them.
Once you submit the documents, wait for the auditor’s response, and don’t be surprised if they request additional documentation. The timeline can vary based on the number of employees and the claim’s complexity, but ERC audits generally take six to nine months.
Common Mistakes to Avoid
To protect your ERC claim, try to avoid these mistakes when responding to Notice 6612:
- Incomplete or inaccurate documentation – The rules for claiming the ERC are very detailed. Ensure the documents you provide fully substantiate your claim and always include written explanations as requested.
- Misinterpretation of the ERC eligibility rules – Unfortunately, if you didn’t understand the eligibility rules, you may have claimed this credit incorrectly. If you realize that you were not entitled to the ERC, you may want to withdraw it.
- The impact of aggressive third-party marketing – Many employers who claimed this credit erroneously did so because they worked with a third party that aggressively marketed improper claims. If that applies to your situation, you may want to withdraw the claim and file Form 14242 (Report Suspected Abusive Tax Promotions or Preparers) to report to the ERC mill.
Perhaps the biggest mistake taxpayers make after receiving Notice 6612 is trying to handle the audit independently or working with their usual tax preparer. Audit representation requires a very specific skill set, and if you’re dealing with the intricacies of the ERC, you need a tax pro who understands this credit.
Options for Withdrawing Your ERC Claim
You may qualify to withdraw your claim if one of the following apply:
- You have not received a refund yet.
- You have received a refund but not cashed the check.
Talk with your auditor about the process, but generally, you can only withdraw the credit if you claimed it on an adjusted return that had no other adjustments and you’re willing to forgo the entire credit. Withdrawing the credit is essentially the same as telling the IRS to ignore your amended payroll return.
Potential Outcomes After Submitting Your Response
After reviewing your records, the auditor may agree with your return, accept it as filed, and issue you a credit refund if you have yet to receive it. Alternatively, they may disallow a portion of your credit. Then, you will receive a partial refund, but if you’ve already received your refund, you will owe a tax liability.
If the auditor denies your claim, you will lose the credit and may incur penalties. Depending on the situation, you may be able to appeal the audit results, or you may have to file a refund lawsuit in federal courts. In either case, you must act promptly if you want to dispute the auditor’s decision effectively.
The IRS may send you Notice 105-C if it disallows your ERC claim. You may receive this notice after an IRS review of your payroll returns or after you complete an ERC audit.
IRS Notice 6612 Frequently Asked Questions
What if I miss the 30-day response deadline for Notice 6612?
The IRS will only allow your claim if you respond by the deadline. At that point, you may have to litigate in federal court or appeal the audit results if you want to preserve your credit. Note that the IRS will generally give you a 30-day extension if you request it before the deadline.
How do I know if my business qualifies for the ERC?
Review the IRS’ eligibility criteria carefully to see if you qualified for the ERC in the quarters you claimed it. Businesses could qualify in two ways: by experiencing a significant reduction in sales compared to 2019 or by continuing to pay employees when operations were suspended. However, there are additional guidelines to these basic qualification criteria.
How long will it take the IRS to process my response?
The response time varies. Generally, you should expect to wait at least a month before the IRS responds to the documents you provide.
What should I do if I can’t provide all the requested documents?
Contact a tax attorney for help, or talk with the auditor about missing documents. You are required to keep tax records for three years after filing a return, and if you do, you can avoid failing the audit.
Audits are nearly always stressful, and even more so when the IRS is scrutinizing a large tax credit. At Wiggam Law, we have extensive experience representing clients through all types of audits, including ERC audits. Regardless of your situation, we can provide you with the guidance you need.
We can also provide you with a risk assessment if you are worried about an ERC claim on a return and wondering if you should withdraw it or look into the IRS’ Voluntary Disclosure Program. Act quickly to avoid additional complications. Schedule a consultation with our team or call us at (404) 233-9800.