The Internal Revenue Service (IRS) is issuing over 20,000 rejection notices to taxpayers who improperly claimed a tax break introduced during the COVID-19 pandemic. This move is part of the agency’s efforts to address questionable claims related to the employee retention credit (ERC), a significant financial aid designed to help small businesses during the pandemic.

The ERC, which offers a substantial amount per eligible employee, became the center of controversy due to widespread marketing encouraging small businesses to claim the credit erroneously. This led the IRS to halt new ERC claim processing in September, following a surge in dubious applications.

IRS Commissioner Danny Werfel expressed concern over the aggressive marketing tactics that led to numerous illegitimate claims. He stated that many of these claims clearly did not meet the legal criteria for the credit.

Beginning this week, taxpayers who are found ineligible will receive Letter 105 C, indicating the disallowance of their claims. Furthermore, the IRS plans to introduce a “voluntary disclosure program” later in the month. This program is intended for those who incorrectly claimed the credit, providing them an opportunity to rectify their filings. The IRS is focusing on rejecting claims from businesses that were either non-existent or had no paid employees during the eligible period.

Commissioner Werfel emphasized that these actions are just the first steps in a broader compliance initiative. He warned that additional letters, including those demanding the return of funds wrongly claimed and received, will be sent out soon.

This development follows the IRS’s recent introduction of a special withdrawal process. This process was implemented to help small businesses that mistakenly claimed the ERC, allowing them to avoid repayment along with potential interest and penalties.