ERC Audit Letter From IRS – What It Means For Your Business

Last Updated on: 13th December 2025, 11:07 pm

ERC Audit Letter From IRS – What It Means and What To Do

The letter sitting in your mailbox right now has already started a countdown you didn’t know about. By the time you opened it, read it, and processed what it meant, days had already passed. The IRS mailed that letter on a specific date – and your deadline to respond is calculated from that date, not from when you actually received it. If the postal service was slow, if you were on vacation, if the letter sat in a stack of mail for a week – none of that matters. Your clock was ticking before you knew a clock existed.

This is the reality facing tens of thousands of business owners who claimed the Employee Retention Credit. The IRS has launched what can only be described as industrial-scale enforcement against ERC claims. Over 84,000 disallowance letters have been sent. Another 30,000 recapture letters demanding repayment of credits already paid. Combined, more than 100,000 businesses are now dealing with some form of IRS action on their ERC claims. And the audit letters – particularly Letter 6612 – are still going out every week.

If you received a letter from the IRS about your Employee Retention Credit claim, this article explains exactly what you’re looking at, what it means for your business, and what you need to do. The decisions you make in the next few days could determine whether you keep your credit, lose it entirely, or face something worse.

The Letter That Changes Everything

The IRS didn’t audit these claims the way they audit most things. They didn’t request your documentation first, review it carefully, and then reach conclusions. They did something completely different. They ran claims through an automated “risk scoring model” and issued denial letters based on algorithm output. No human being examined your specific situation. No examiner reviewed your payroll records or government orders. A computer decided your claim looked suspicious based on pattern analysis, and a form letter went out saying you’re denied.

Think about what that means. You filed a claim. You waited eighteen months or more for the IRS to process it. And when they finally got around to looking at it, they didnt actually look at it. They fed it into a computer program that compared your claim to statistical patterns. If your claim shared characteristics with claims the algorithm flagged as problematic – maybe your preparer filed other questionable claims, maybe your claim size seemed too high relative to your employee count, maybe the quarter you claimed raised flags – the computer decided you were wrong. And now your having to prove you were right.

Thats the irony that dosent make you laugh. It makes you sick. The same IRS that took a year and a half to process your original claim now gives you thirty days to defend yourself. They took their time deciding wheather to pay you. But the deadline for you to respond to their denial? That starts running the moment they drop the letter in the mail.

Understanding Your Letter Type

The first thing you need to know is which letter you received. The IRS is using several different letters for ERC enforcement, and each one means something different. Confusing them is a mistake you cant afford to make.

Letter 6612 is an audit notification. It tells you that your ERC claim is under active examination and your credit is being held pending the outcome. Included with Letter 6612 is Form 4564, an Information Document Request that asks thirteen multi-part questions about your claim. This is a correspondence audit – your not going to meet with an examiner in person. Your responding to a form, with documentation, under a thirty-day deadline.

Letter 105-C is a full disallowance. Your entire ERC claim for the quarter identified has been rejected. This is what the IRS sends when they’ve decided – often based on that algorithm – that your claim is invalid. If you do nothing, you get nothing. The credit is gone.

Letter 106-C is a partial disallowance. The IRS accepts that you qualify for some credit but denies the amount exceeding there calculated limits. Maybe you claimed more then the per-employee caps allow. Maybe they think some of your wages werent qualified. You get part of what you claimed, not all of it.

Letter 6577-C is a recapture letter. This is the worst one to recieve becuase it means the IRS already paid you and now wants the money back. There not denying a claim that hasnt been paid yet – there reversing a payment thats already in your bank account. The money you thought you had, they want returned.

Letter 6612 – Your Claim Is Under Examination

If you recieved Letter 6612 with Form 4564, your claim is being audited. This isnt a routine inquiry. This is an examination, and how you respond determines wheather you keep your credit or lose it.

The IRS dosent tell you why they selected your claim for examination. It could be random. It could be becuase your preparer filed other claims that raised red flags. It could be becuase something about your claim – the size, the timing, the eligibility basis – triggered there risk model. You wont know why your being audited. You just know that you are.

Form 4564 asks detailed questions that go to the heart of your eligibility. For any quarter claimed under the government order suspension test, they want:

• Copies of the actual government orders you relied on with specific provisions highlighted showing how those orders affected your business
• Documentation proving the orders caused a full or partial suspension of your operations
• Details on what portion of your business was affected and by how much

For gross receipts decline claims, they want quarterly revenue figures, comparison calculations showing you met the required decline thresholds, and financial records supporting those figures.

For all claims, they want payroll documentation, worksheets showing exactly how you calculated the credit, proof that the wages you claimed werent also used for PPP loan forgiveness or other COVID relief programs, and details about any employees related to majority owners.

Heres the problem. If your ERC preparer didnt give you this documentation – if they just filed the claim and sent you a check minus there fee – you may not have what the IRS is asking for. Many ERC mills didnt provide clients with the detailed calculations and supporting analysis that a proper professional would create. Now your being asked to produce documents that may never have existed in the first place.

The 30-Day Deadline That Already Started

The deadline is thirty days from the date on the letter. Not thirty days from when you recieved it. Not thirty days from when you opened it. Thirty days from the date printed in the upper right corner, which is the date the IRS mailed it.

Postal service delivery times vary. If the letter took a week to reach you, you’ve already lost seven of your thirty days before you knew there was a letter. If you were traveling and the letter sat in your mailbox, more time gone. If it went to an old address and got forwarded, even more delay.

The consequence of missing the deadline is automatic full denial of your claim. The IRS guidance is explicit: if an employer fails to meet the deadline or asks for an extension, the IRS will disallow the ERC claim in full. No exceptions mentioned. No grace period described. Miss the date, lose the credit.

You can request an extension, but the guidance suggests that asking for more time still results in denial. This creates an impossible situation for some businesses. Gathering all the required documentation in thirty days is difficult even under ideal circumstances. If you had a clean file ready to go, you might manage it. But if your records are scattered, if your preparer is unavailable, if you need to reconstruct calculations that were never documented properly – thirty days may not be enough.

The clock dosent care about your circumstances. It started ticking before you knew it existed, and it wont pause becuase your having trouble finding documents.

What Form 4564 Is Actually Asking For

Form 4564 contains thirteen multi-part questions, and each one is designed to test a different aspect of your eligibility. Understanding what there really asking helps you prepare a response that addresses there concerns.

For suspension claims, the IRS wants to see the actual government orders – not summaries, not descriptions, but copies of the orders themselves with the relevant provisions highlighted. They want you to show exactly which provisions caused a suspension and how. Generic statements about COVID impacts wont satisfy this requirement. You need to draw a direct line from specific language in specific orders to specific impacts on your specific business operations.

They also want proof that your business operations were actualy suspended. If you claimed partial suspension, they want documentation of what percentage of your business was affected. This isnt something most businesses documented in real time. Your going to have to reconstruct it from contemporaneous records – and hope those records support the percentages claimed on your return.

For the wages themselves, the IRS wants payroll records proving the amounts claimed. They want worksheets showing exactly how the credit was calculated. And they want proof that those wages werent double-dipped – that you didnt claim the same wages for PPP loan forgiveness, Shuttered Venue Operators Grants, Restaurant Revitalization Fund grants, or paid sick and family leave credits under FFCRA.

Related party wages are another focus. If any employees were related to majority owners, those wages may not be qualified wages under the ERC rules. The IRS wants details about these relationships and confirmation that related party wages werent included in your claim.

If your missing any of these pieces, your response is incomplete. An incomplete response may result in the same outcome as no response: full denial.

The Reverse Audit Problem

Normal IRS audits work like this: you file a return, the IRS selects it for examination, an examiner reviews your documentation, asks questions, evaluates your explanations, and then makes a determination. You have the opportunity to present your case before any adverse decision is made.

ERC disallowances work backwards. The IRS runs your claim through an algorithm. If the algorithm dosent like it, they send a denial letter. Now your responsible for proving you were right – proving you qualified, proving your calculations were correct, proving you met every requirement. The burden shifted to you.

This is what tax practitioners call a “reverse audit.” Your guilty until proven innocent. The IRS decided your claim was invalid first, based on pattern analysis rather then individual review. Now you have to convince them they made a mistake.

The reverse audit creates particular problems for legitimate claimants. You did everything right. You qualified for the credit. You claimed the correct amount. But becuase your claim shared some characteristic with problematic claims – maybe you used the same preparer, maybe your in the same industry, maybe your claim size fell into a statistical range the algorithm flagged – you got swept up in mass denials.

Your individual merit wasnt considered in the initial decision. Your having to prove that individual merit now, under deadline pressure, against an assumption that your wrong.

Over 100,000 Businesses Facing Enforcement

The scale of IRS enforcement on ERC claims is unprecedented. This isnt targeted auditing of a few suspicious cases. This is mass action affecting tens of thousands of businesses simultaneously.

In August 2024, the IRS announced it would send up to 30,000 Letter 6577-C recapture letters. These are the letters demanding repayment of credits already paid. By themselves, 30,000 recapture letters would be a major enforcement wave.

But thats not all. The IRS has also sent over 84,000 disallowance letters – Letters 105-C and 106-C – denying claims that havent been paid yet. Combined, more then 100,000 businesses are dealing with some form of adverse IRS action on their ERC claims.

And the audit letters keep going out. Letter 6612 examinations are ongoing. More businesses are being pulled into the process every week. The IRS has indicated this enforcement will continue for years.

Were not talking about random audits here. This is industrial scale enforcement. The IRS built automated systems to flag claims for denial. They created standardized letters and standardized procedures. They hired additional staff. This is a machine designed to process massive volumes of cases, and your case is one of the cases in that machine.

The question isnt wheather the IRS is serious about ERC enforcement. There clearly serious. The question is how you navigate an enforcement machine that was designed for volume, not individual justice.

Legitimate Claims Caught In The Dragnet

Heres the uncomfortable truth that nobody at the IRS wants to acknowledge publicly: the algorithm isnt perfect. Statistical models flag patterns. But sharing a pattern with bad claims dosent make your claim bad. Many legitimately eligible businesses have been denied for reasons that have nothing to do with there actual eligibility.

You could have been completely eligible. Your government order suspension could have been real. Your gross receipts decline could have been documented. Your wages could have been properly calculated. And you still got that denial letter becuase of something outside your control – your preparer’s other clients, your industry’s statistical profile, some characteristic of your claim that the algorithm weighted negatively.

The Taxpayer Advocate Service has raised concerns about this exact problem. There 2024 Annual Report to Congress noted that the IRS issued disallowance letters without ever requesting supporting documentation or considering the specific facts and circumstances of individual taxpayers. The report questioned wheather algorithmic denial without individual review is appropriate.

Its one thing for the IRS to flag suspicious claims for closer examination. Its another thing entirely to deny claims outright based on pattern analysis. The first approach says “we want to look at this more closely.” The second approach says “your wrong” before looking at anything.

If your claim was legitimate and you got a denial letter, you have to decide wheather to fight. Fighting takes time and resources. But accepting a wrongful denial means losing money you were entitled to. The choice isnt easy. Neither option is free.

The OBBB Cutoff You Need To Know About

Recent legislation has created an absolute deadline that affects some ERC claims regardless of merit. The One, Big, Beautiful Bill includes provisions that fundamentally change the rules for certain claims.

Heres what you need to understand: under the OBBB, the IRS cannot allow or refund ERC claims for the third and fourth quarters of 2021 if those claims were filed after January 31, 2024. This is true even if you met every eligibility requirement. Even if you would have qualified. Even if the IRS would otherwise have approved your claim.

The statutory bar took effect July 4, 2025. If your Q3 or Q4 2021 claim was filed after January 31, 2024, and it wasnt processed before the cutoff, that claim is dead. Not denied for lack of merit. Dead becuase Congress said the IRS cant pay it anymore.

This affects claims that were caught in the processing moratorium. The IRS stopped processing new ERC claims in September 2023. Businesses that filed after that date had there claims sitting in queue while the moratorium ran. Some of those claims missed the January 31, 2024 filing deadline for protection. Now those claims face a statutory bar regardless of wheather they would have otherwise qualified.

If you have a Q3 or Q4 2021 claim and your not sure when it was filed, find out immediately. The filing date determines wheather your claim falls under the OBBB cutoff. If it does, the appeals process may not help you becuase the IRS literaly cannot pay the claim even if they wanted to.

What To Do Right Now

If your holding an IRS letter about your ERC claim, here is what you should do.

First, identify exactly which letter you have. Look at the letter number in the upper right corner. Letter 6612 means examination. Letter 105-C means full denial. Letter 106-C means partial denial. Letter 6577-C means recapture. Your response strategy depends on which letter type you received.

Second, find the date on the letter. This is your deadline anchor. Count thirty days from that date, not from today. Mark that deadline on every calendar you use. Set multiple reminders. Missing this date could cost you everything.

Third, gather your documentation:

• Your original Form 941-X
• Worksheets showing how your credit was calculated
• Copies of government orders you relied on
• Payroll records for the quarters claimed
• Proof that those wages werent claimed for PPP forgiveness or other COVID relief

The more documentation you have ready, the better your response will be.

Fourth, evaluate wheather you need professional help. If your claim was simple and well-documented, you might be able to respond yourself. But if your claim was complex, if your documentation is incomplete, if you have any concerns about the calculations – get help from a tax professional who understands ERC disputes. This is not the time for DIY tax representation.

Fifth, if your claim was filed by a promoter who promised guaranteed results, understand that there promises dont protect you. Your signature is on that return. Your responsibility. The promoter may be under investigation themselves. There records may be in government hands. Dont assume that blaming your preparer will make this go away.

Sixth, respond before the deadline. Even if your response isnt perfect. Even if your documentation is incomplete. A flawed response is better then no response. No response means automatic denial with no opportunity to explain yourself.

The ERC audit letter in your mailbox represents a serious challenge to your business. But challenges can be met. Deadlines can be hit. Documentation can be assembled. Appeals can be filed. The worst outcome comes from paralysis – from staring at the letter and hoping it goes away. It wont go away. The only path forward is through.