What to Do If You Receive IRS Letter 6550
This guide offers a procedural framework for taxpayers who receive IRS Letter 6550, helping them assess their ERC claim and address the notice.
Receiving a notice from the Internal Revenue Service can be concerning for a business owner. The IRS is sending letters to taxpayers whose claims for the Employee Retention Credit (ERC) may be ineligible. This is part of a wider initiative by the IRS to address a surge in questionable ERC claims, many submitted based on advice from aggressive marketing campaigns. The ERC was a refundable tax credit for businesses that kept employees on payroll during the COVID-19 pandemic. An IRS notice serves as a formal notification that the agency is scrutinizing the claim and provides an opportunity to take corrective action before more formal enforcement begins.
Understanding Your ERC Eligibility
Before taking any action, re-evaluate the basis of your original ERC claim. For most businesses, the credit applied to wages paid between March 12, 2020, and October 1, 2021. Eligibility primarily followed two distinct paths. The first was a significant decline in gross receipts, which required comparing a calendar quarter’s gross receipts to the same quarter in 2019. For 2020, the decline needed to be at least 50%, while for 2021, it was a decline of more than 20%.
The second path to eligibility was a full or partial suspension of business operations due to a government order related to COVID-19. This suspension must have been more than a nominal disruption and directly tied to a government mandate. To review your claim, gather documents from the relevant period, including quarterly financial statements, payroll records such as Form 941, and copies of the specific government orders that impacted your operations. A review of these documents against the official eligibility criteria is the first step.
Responding to an IRS Notice
If you determine your claim is invalid, the IRS provides procedural options for resolution. The path you take depends on whether you have received the refund payment. If you filed a claim for the ERC but have not yet received the payment, you can withdraw the claim. This process allows you to retract your submission as if it were never filed, and the IRS will not impose penalties or interest. You must follow the specific instructions for claim withdrawal.
If you have already received and deposited the ERC refund, you must repay the amount to the IRS. This is accomplished by filing an amended employment tax return, Form 941-X, for each quarter in which you incorrectly claimed the credit. On this form, you will adjust the previously claimed credit amount, which will result in a balance due. Paying this balance is important to stop the accrual of further interest.
Consequences of Inaction
Ignoring an IRS notice when your ERC claim is ineligible can lead to financial repercussions. Failure to respond will likely trigger a tax examination, or audit, of your employment tax returns. During an audit, the IRS will formally disallow the improperly claimed credit and demand repayment of the full amount.
Beyond repayment, the financial penalties can be substantial. The IRS can impose an accuracy-related penalty of 20% of the underpayment amount. If the agency determines the claim was fraudulent, the penalty can increase to 75%. Interest will be charged on the entire balance, including the original credit amount and any penalties assessed, accruing from the date the credit was improperly received.