We helped one of our business clients file (via 941-X) for the ERC for two quarters in 2021, after we determined that they qualified. This was nearly a year ago. We were working this week on the 2022 accounting, and turned out that for one of the checks, the IRS made some sort of data entry error, and misplaced a decimal point by two spaces. Instead of a $793 Non-refundable portion of the ERC, they showed $79,300, added it to the refundable portion and issued the business a check for close to $100k.
The business owner did not contact us, but just deposited it into his business bank account in June 2022. It was misidentified by the bookkeeper as business income, and it was only when I asked the business owner for the letters from the IRS (since I couldn't locate the ERC deposits) that the mistake came to light. The business owner claimed he did not realize that the check wasn't correct at the time.
Needless to say, the business owner no longer has the $79k to pay back the IRS. He closed the business late in 2022 after selling the assets of the company. The LLC's checking account has a minimal balance.
Just wondering whether anyone out there has any experience with (large) erroneous refunds with any of their clients, particularly one in which the taxpayer cashed the check? I have looked through https://www.irs.gov/pub/irs-wd/0014033.pdf and IRM 21.4.5. In this case, the IRS is unaware of the erroneous refund, and the business owner does not have the means to repay. The business has closed, so there will be no future tax refunds that the IRS could offset.
Any advice or experiences to share? We did advise returning the $79k to the IRS (esp. because of the possibility of an ERC audit), but he let us know he doesn't have the means to repay. Not sure what to advise the client to do at this point. Thanks in advance.