As of today (December 31, 2024), there is still a moratorium in place for all ERC claims filed after January 31, 2024. But we have begun to see other ERC claims being processed by the IRS. While this a favorable development, there has also been an uptick in disallowance notices (IRS Letter 105C) and claw back notices (IRS Letter 6577C). We previously covered Letter 105C (in a separate blog post) and we will cover the IRS Letter 6577C below. 

What is the IRS Letter 6577C?

A 6577C letter is a claw back notice to reduce a portion of the ERC claim. Most of these letters are attempting to claw back a portion of the credit using a calculation of the “maximum” allowable claim based on the total employees reported on the original Form 941 for the quarter (See Form 941 - Part 1, Box 1) x the maximum credit amount per employee ($7,000 for 2021). However, the number of employees reported on the original Form 941 are only those employees that received wages in the pay period covering the 12th day of the last month of the quarter. This number excludes employees that were paid in the other pay periods in that quarter but were excluded from the pay period covering the 12th day of the last month of the quarter - these employees may have not worked, may have been hired or terminated during the quarter.  These employees would also be eligible for the credit. The IRS is likely aware of this, but this is yet another initiative aimed at recovering some of the funds that were released to businesses improperly. 

What to do?

If your claim was properly calculated, the response to an IRS 6577C letter is relatively straightforward. The response should explain that the difference in the calculation relates to the potential employees not captured in the payroll on the 12th of the 3rd month of the quarter. It is also recommended to state that all of the rules for calculating the credit ($10,000 limit, no double-dipping on PPP forgiveness wages, etc.), were followed in performing the calculation. 

If you receive an IRS Letter 6577C, or 105C/106C letters from the IRS (covered in a previous blog), it is important to discuss with your tax advisor and respond (if necessary) in a timely manner. Based on the IRS activity over the last few months, we expect these disallowance and claw back initiatives to continue for as long as the statutes remain open.

Received an IRS Letter 6577C, 105C, or 106C? Contact us today to ensure a timely and informed response!