IRS ERC Clawback: They Want Your Refund Back

The IRS is aggressively pursuing recapture of ERC refunds it believes were improperly paid. Over 30,000 businesses have received clawback notices demanding repayment of more than $1 billion combined. If you've received a demand to return your ERC refund, you have options—but you need to act quickly.

What is an ERC Clawback?

An ERC clawback occurs when the IRS determines that you received an Employee Retention Credit you weren't entitled to and demands repayment. This is different from a denial of an unprocessed claim—a clawback means you already received money and the IRS wants it back.

The official clawback notice is Letter 6577-C, which gives you only 21 days to respond.

Why the IRS is Clawing Back ERC Refunds

The IRS is targeting ERC refunds for several reasons:

• Post-payment audits: The IRS is now reviewing claims that were paid during the initial processing surge before enhanced scrutiny began.
• ERC mill targeting: Claims filed by known aggressive promoters are being systematically reviewed and challenged.
• Information matching: IRS systems are identifying claims that don't match other reported business information.
• Fraud indicators: Claims showing signs of fraud or improper eligibility are prioritized for clawback.

Can You Fight a Clawback?

Yes, you can dispute an ERC clawback if you believe your claim was valid. Your options include:

• Challenge the determination: If you have documentation proving eligibility, you can contest the clawback directly.
• Request Appeals consideration: Ask for your case to be reviewed by IRS Appeals before collection begins.
• Negotiate a settlement: In some cases, you may be able to settle for less than the full amount demanded.
• Request a payment plan: If you owe the money but can't pay in full, an installment agreement may be possible.

What Happens If You Don't Respond

Ignoring a clawback notice has serious consequences:

• Automatic assessment: The IRS will assess the full amount owed without further review.
• Interest accrual: Interest continues to compound from the date you received the original refund.
• Collection actions: The IRS can levy your bank accounts, garnish wages, and file tax liens.
• Business impact: Collection activities can severely impact your business operations and credit.

Financial Impact of Clawbacks

Understanding what you may owe helps you plan:

• Principal amount: The original ERC refund you received.
• Interest: Interest from the date of the original refund (not the clawback notice date).
• Accuracy penalty: 20% penalty if the IRS determines you were negligent or substantially understated eligibility.
• OBBBA penalty: Additional 20% erroneous claim penalty under new legislation.
• Fraud penalty: 75% penalty if fraud is determined (replaces accuracy penalty).