The IRS is sending more than 20,000 letters to taxpayers to inform them that their Employee Retention Credit (ERC) claims have been denied after an initial review found large numbers of claimants who did not meet the eligibility requirements for the credit.

This group of letters will cover taxpayers ineligible for the ERC either because their entities did not exist or because they did not have employees for the time period when the credit was claimed.

In September, the IRS had announced a moratorium on processing these claims due to a proliferation of dubious promoted by so-called ERC mills. At the time, the IRS stressed that the ERC is “an incredibly complex credit" with "very specific eligibility requirements."

A month later, the agency established a new process that gave employers the ability to rescind what may have been inaccurate ERC claims.

"With the aggressive marketing we saw with this credit, it's not surprising that we're seeing claims that clearly fall outside of the legal requirements," said IRS Commissioner Danny Werfel in a statement. "The action we are taking today is part of an initial set of steps in our compliance work in this area, and more letters will be going out in the near future, including both disallowance letters and letters seeking the return of funds erroneously claimed and received."

He added, "As we continue our audit and criminal investigation work involving the Employee Retention Credits, we continue to urge people who submitted a claim to review the rules with a trusted tax professional. If they filed an inaccurate claim, we urge them to consider withdrawing their pending claim or use the upcoming disclosure program to repay improper refunds to avoid future action."

The disallowance letter will explain that taxpayers who disagree with the disallowance can respond with documentation that supports their eligibility or claim amount, or they can file an administrative appeal.

The disallowance letters that identify ineligible claims before they are paid serve several purposes that help taxpayers and tax administration, according to the IRS. They help ineligible taxpayers avoid audits, repayment, penalties and interest; protect taxpayers by preventing an incorrect refund from going to an ERC promoter; and save IRS resources by disallowing incorrect credits before they enter the audit process.

Later this month, the IRS will introduce a separate voluntary disclosure program that will allow those who received questionable payments to come in and avoid future IRS action.