The Internal Revenue Service has announced that, following the moratorium on processing Employee Retention Credit claims after Sept. 14, 2023, it is starting to process claims received prior to that date. The IRS further reported that it had an inventory of 1.4 million ERC claims totaling more than $86 billion and was receiving new claims at a rate of 17,000 per week. The agency is continuing the moratorium on processing new claims out of fear that ending it would result in a flood of additional claims.
Of those ERC claims it has processed, the IRS reports that it approved 28,000 claims worth $2.2 billion and disallowed 14,000 claims worth more than $1 billion. This indicates a denial rate of approximately one out of every three claims. Since the moratorium was initiated, the agency has been digitizing the information in the claims and analyzing the data. This has helped identify the common issues with problem claims. The IRS has issued guidance identifying seven warning signs that an ERC claim may be incorrect.
The claims analysis undertaken by the IRS has determined that 10 to 20% of the claims are high-risk and will be issued denial letters in the weeks ahead, some of which have already been issued. The IRS determined that 60 to 70% of the claims showed an unacceptable level of risk and will be subject to additional analysis to further evaluate the claims. Only 10 to 20% of the claims were evaluated as being low-risk, and the IRS indicated that it would begin processing those returns, with payments issued this summer, with the oldest claims processed first.
If the processing of the claims indicates a calculation error, the IRS will adjust the payment to compensate for the calculation error. Initially, all the claims being processed will be from prior to Sept. 14, 2023.
Voluntary disclosure program
The IRS's voluntary disclosure program for ERC claims ended in May, 2024. It resulted in 2,600 applications involving $1.09 billion. The agency indicated that it might reopen the program at a reduced rate for those taxpayers with previously processed claims who wish to avoid future compliance action by the IRS.
IRS withdrawal program
The continuing IRS withdrawal program initially involved letters to taxpayers for the 2020 tax year. Withdrawal results in the agency treating the ERC claim as though it had never been filed, with no interest or penalties.
The IRS reported in June 2024, that the withdrawal program had resulted in 4,800 entities withdrawing $531 million in ERC claims. For the initial round of letters, the agency determined that more than 12,000 entities filed over 22,000 claims that were improper and resulted in $572 million in assessments. The letters to address the 2021 tax year will generally involve larger claims.
Enforcement activity
The IRS states that they have thousands of ERC claims currently under audit. As of May 31, 2024, the agency has initiated 450 criminal cases, with potentially fraudulent claims worth nearly $7 billion; 36 investigations had resulted in federal charges; 16 investigations had resulted in convictions; and seven sentencings had resulted in average sentences of 25 months. The service is also conducting investigations of promoters and return preparers for improper activities.
Summary
The processing of ERC claims, while underway at least in part, promises to be a long process given the backlog the IRS is facing. Efforts in Congress to extend the statute of limitations for ERC claims and to shorten the filing deadline for ERC claims has so far been unsuccessful.
The current filing deadline is April 15, 2025, for the 2021 tax year. The IRS withdrawal program remains available to taxpayers facing denial of their claims. The IRS has also indicated that it might reopen the voluntary disclosure program. Taxpayers who now have doubts about the validity of their ERC claims could also consider filing an amended tax return.
Taxpayers who continue to feel that they have legitimate ERC claims may still have to wait a considerable time until the IRS processes those claims and completes its analysis of those claims where it has identified some risks. The agency has stated that taxpayers need to take no action at this time, and also that no information on the status of processing particular ERC claims will be available on the IRS hotline.
For taxpayers who are concerned about waiting until the IRS is able to process their claim, there may be an ability to somewhat advance the process by filing a claim for refund. Given the high percentage of ERC claims where the IRS has at least tentatively identified some possible problems, taxpayers should be working with trusted tax professionals to make sure that they have the facts and documents assembled to support their position should a denial letter ultimately be issued and the taxpayer wants to appeal or file a refund claim.
The IRS has promulgated an ERC Eligibility Checklist and a list of frequently asked questions on the ERC to further help taxpayers in assessing the merits of their ERC claims.
