The IRS announced that it is accelerating Employee Retention Credit (ERC) payments as well as continuing to work on denials of improper ERC claims. In addition, it announced that it is shifting the end date of its moratorium on processing new claims from Sept. 14, 2023, to Jan. 31, 2024.
The IRS is also “intensifying audits and pursuing civil and criminal investigations of potential fraud and abuse,” the agency stated. “The findings of the IRS review, announced in June, confirmed concerns raised by tax professionals and others that there was an extremely high rate of improper ERC claims in the current inventory of ERC claims."
The ERC is a refundable tax credit for businesses that continued to pay employees while shut down due to the COVID-19 pandemic or that had significant declines in gross receipts from March 13, 2020, to Dec. 31, 2021. The IRS repeatedly warned businesses and tax-exempt groups to be wary of companies and individuals that falsely tell them that they are eligible for the credit. But those repeated warnings did not deter many unscrupulous promoters from falsely advertising their ability to obtain the credit for almost anybody.
In September 2023, the IRS imposed a moratorium on processing new ERC claims in order to add more safeguards to prevent future abuse and to protect businesses from predatory tactics. At the time, the IRS also said that it was working with the U.S. Department of Justice to pursue fraud fueled by aggressive marketing.
In its latest announcement, the IRS stated, “Previously, the agency was not processing claims filed after Sept. 14, 2023. As the agency moves forward, it will now start judiciously processing claims filed between Sept. 14, 2023, and Jan. 31, 2024. Like the rest of the ERC inventory, work will focus on the highest and lowest risk claims at the top and bottom end of the spectrum. This means there will be instances where the agency will start taking actions on claims submitted in this time period when the agency has seen a sound basis to pay or deny a refund claim.”
“The Employee Retention Credit is one of the most complex tax provisions ever administered by the IRS, and the agency continues working hard to balance our work to protect taxpayers from improper claims while also making payments to qualifying businesses,” said IRS Commissioner Danny Werfel. “It has been a time-consuming process to separate valid claims from invalid ones. During the past year, we maintained a steady cadence of both ERC approvals and disapprovals.”
“This has been a resource-intensive credit for IRS teams to evaluate,” Werfel said. “Unfortunately, the situation was compounded by misleading marketing flooding businesses to claim these credits, creating a perfect storm that added risk of improper payments for taxpayers and the government while complicating processing for the IRS and slowing claims to legitimate businesses.”
Accounting Today reported that, in a press call on Aug. 8, Werfel further explained, "These claims span multiple tax law changes, multiple calendar year quarters and have differing payment amounts. These have to be worked individually, claim by claim, and they all come in on paper, adding even further to the complexity of sorting valid claims from invalid ones. During the past year, we maintained a slow, judicious cadence of both ERC approvals and disapprovals, but we are now taking important steps forward to intensify our pace and begin reducing the overall inventory of pending ERC claims. Today, we are moving forward with our long-held plans to continue to deny claims when they appear improper, and also moving to pay out more legitimate claims. We're doing this by moving a substantial group of claims into both categories."
The IRS said it recently issued 28,000 disallowance letters, and is aware of concerns raised by tax professionals about potential errors in those letters. The agency said that while it is still evaluating the results of this first significant wave of disallowances in 2024, early indications indicate that errors are relatively isolated and that more than 90 percent of disallowance notices were validly issued.
The agency also reported that it “learned that some of the recent early mailings have inadvertently omitted a paragraph highlighting the process for filing an appeal to the IRS or district court, and the agency is taking steps to ensure this language is mailed to all relevant taxpayers. Regardless of the language in the notice, the IRS emphasizes taxpayers have administrative appeals rights available to them and reminds all taxpayers that details on the process for filing an appeal or otherwise challenging an IRS determination can be found throughout the agency’s literature and on IRS.gov.”
The IRS reported that it is continuing to analyze ERC claims, intensifying audits and pursing promoter and criminal investigations. Beyond the disallowance letters, current initiatives results include:
• ERC Claim Withdrawal Program: The claim withdrawal process for unprocessed ERC claims has led to more than 7,300 entities withdrawing $677 million.
• ERC Voluntary Disclosure Program: During the VDP, which ended in March, the IRS received more than 2,600 applications from ERC recipients that disclosed $1.09 billion worth of credits.
• Criminal investigations: As of July 1, 2024, IRS Criminal Investigation has initiated 460 criminal cases, with potentially fraudulent claims worth nearly $7 billion. In all, 37 investigations have resulted in federal charges so far, with 17 investigations resulting in convictions and nine sentencings with an average sentence of 20 months.
• Promoter investigations: The IRS is gathering information about suspected abusive tax promoters and preparers improperly promoting the ability to claim the ERC. The IRS’s Office of Promoter Investigations has received hundreds of referrals from internal and external sources. The IRS will continue civil and criminal enforcement efforts of these unscrupulous promoters and preparers.
• Audits: The IRS has thousands of ERC claims currently under audit.