Tax Blog/Blawg

IRS ERC ANNOUNCEMENT (IR-2024-169, June 20, 2024) - Following a lengthy review of numerous Employee Retention Credit ("ERC") claims, the IRS has announced plans to deny tens of thousands of “improper high-risk ERC claims” (about 10-20% of total ERCs) while starting a new round of processing lower-risk claims to help eligible taxpayers. During the review period, the IRS processed 28,000 claims worth $2.2 billion and disallowed more than 14,000 claims worth more than $1 billion. Various estimates of total ERC claims have exceeded $240 billion.

The IRS' review involved months of digitizing information and analyzing data since commencement of the ERC processing moratorium on September 14, 2023 (IR-2023-169, Sept. 14, 2023). The IRS analyzed more than 1 million ERC claims representing more than $86 billion filed amid what the IRS has described as “aggressive marketing” last year. Since the moratorium was put in place, the IRS has continued to receive ERC claims at the rate of more than 17,000 a week, with an inventory currently at 1.4 million.claims.  Given the size and growth of this inventory, the IRS will keep the processing moratorium in place on ERC claims submitted after September 14, 2023. The IRS has emphasized that “taxpayers with claims do not need to take any action at this point, and they should await further notification from the IRS.”

For the 10-20% of ERC claims with no eligibility warning signs (and that were received prior to September 14, 2023), payment of these claim is expected to be made later this summer. However, the IRS has emphasized that given the need for increased scrutiny, new payments will be made at a “dramatically slower pace” than payments made during the pandemic period.

The IRS analysis also estimates that between 60% and 70% of the ERC claims show an unacceptable level of risk. For this category of claims with risk indicators, the IRS will be conducting additional analysis to gather more information with a goal of improving the agency’s compliance review, speeding resolution of valid claims while protecting against improper payments.

As the additional IRS ERC processing work begins at a measured pace, other ERC claims will begin being “paid later this summer following a final review.”  For submissions that have calculation errors, the amount claimed will be adjusted before payment. The IRS also noted that generally the oldest claims will be worked first, and no claims submitted during the moratorium period will be processed at this time.

Congress intended these important credits to help relieve the financial pain from the pandemic. Time for the processing of eligible ERC claims is to be resumed on an expedited basis. Many good, compliant and fully eligible businesses are struggling, surviving on borrowed funds they hoped and expected could be quickly repaid from timely processing of their ERC claims.  To help these small businesses survive, it is imperative that the IRS demonstrate that it can move expeditiously.  Even with its still limited resources, the dedicated IRS and IRS-CI workforce is well equipped to deal with fraudulent claims.

The IRS is currently assessing whether to reopen the special ERC Voluntary Disclosure Program to help taxpayers get into compliance on paid claims and avoid future IRS compliance action, including audits. As is often the case with new iterations of prior programs, if the VDP program reopens, the IRS anticipates “the terms will not be as favorable as the initial offering that closed in the spring.”

The IRS is working with Congress to seek additional guidance on the ERC program, including “potentially closing down new claims entirely and seeking an extension of the statute of limitations to allow the agency more time to pursue improper claims.” The IRS analysis of an "improper" ERC claim" may differ significantly from Congressional intent and the plain language of the authorizing legislation. There are many variables but, where appropriate, we are now pursuing federal refund litigation as the most viable option for prompt payment to eligible ERC claimants - for those who are denied as well as for those where payment continues to be delayed indefinitely.

We are supportive of IRS successes in stopping perhaps $1 billion or more in ineligible ERC claims but let's not continue to ignore the possibly hundreds of thousands or more of eligible struggling businesses. Leadership needs to step into this and may have to assume calculated processing risks, but cannot continue to ignore the ongoing significant financial damage being done to people in need as a direct result of IRS inaction.