$800K+ in ERC Credits
Preserved After IRS Disallowance

The Situation

An IRS Notice Threatening to Claw Back Over $800K in ERC Credits

Our client -- a mid-sized business that had claimed Employee Retention Credits during the COVID-19 pandemic -- received a notice from the IRS disallowing their entire ERC claim. The IRS asserted that the business did not meet the eligibility requirements for the credit, and demanded repayment of over $800,000 plus penalties and interest.

The client's original ERC preparer had moved on and was unresponsive. The business owner was left holding a six-figure bill with no one to explain why the credits had been claimed in the first place -- or how to defend them.

The Challenge

Proving Eligibility When the Original Documentation Was Thin

The IRS's position was straightforward: the business had not demonstrated a qualifying government order that caused a full or partial suspension of operations, nor had it shown a sufficient decline in gross receipts during the relevant quarters.

The original ERC application was bare-bones. The preparer had filed the amended returns claiming the credits but had not assembled the substantive documentation the IRS would eventually require. There were no contemporaneous records of how government orders had affected specific business operations, and the gross receipts analysis was incomplete.

We needed to build the case from scratch -- and do it under audit pressure with IRS deadlines looming.

Our Approach

We Rebuilt the Eligibility Case From the Ground Up

Our ERC defense team took a methodical approach. We started by analyzing every federal, state, and local government order that applied to the client's business during the relevant quarters. We mapped each order to specific business operations that were suspended or modified.

Then we reconstructed the financial picture. We pulled quarterly revenue data, compared it against the appropriate baseline periods, and built a comprehensive gross receipts analysis that demonstrated eligibility under the alternative test.

The result was a defense package that addressed every element the IRS was questioning:

• Identified three separate government orders that caused partial suspension of operations
• Documented specific business functions affected by each order with contemporaneous evidence
• Reconstructed quarter-by-quarter gross receipts analysis proving the required decline threshold
• Prepared detailed legal memoranda citing applicable IRS guidance and case law
• Responded to every IRS information request within the prescribed deadlines

The Outcome

Full Credit Amount Preserved. Nothing Clawed Back.

The IRS withdrew its disallowance notice and accepted the client's ERC claims in full. Over $800,000 in credits were preserved -- money the business had already received and deployed into operations. No penalties. No interest. No clawback.

More importantly, the client now has a complete, audit-ready documentation package that will withstand any future IRS scrutiny of their ERC claims.

Key Takeaways

What Business Owners Should Know About ERC Audits

If the IRS is questioning your ERC claim, here's what you need to understand:

• A disallowance notice is not the final word. The IRS is auditing ERC claims in bulk. Many legitimate claims get flagged. You have the right to respond.
• Your original preparer may not be able to defend you. Many ERC mills have closed or gone silent. You need a tax attorney who understands audit defense.
• Documentation is everything. The IRS wants to see government orders, operational impact, and financial records. If you don't have them organized, build the case now.
• Time matters. You have limited windows to respond to IRS notices. Missing deadlines can turn a defensible position into a loss.