The IRS changed its policy for prerefund examinations to expedite the processing of employee retention credit (ERC) claims. According to the Journal of Accountancy, the Treasury Inspector General for Tax Administration (TIGTA) stated in a report released Sept 30 that the IRS must consider reviewing roughly 185,000 claims totaling approximately $42 billion.
According to TIGTA, the IRS made various efforts to increase awareness of ERC eligibility requirements. The agency issued numerous press releases and electronic news articles aimed at tax professionals and other subscribers regarding eligibility requirements and ERC promoters. The news articles also told taxpayers to read the frequently asked questions and other eligibility information on the agency’s website.
Additionally, the IRS updated identity theft filters and identified over 155,000 tax returns claiming possibly erroneous ERC, preventing $487 million in refunds from being issued during 2021 through 2023 processing years.
Despite these efforts by the IRS, TIGTA still found the following:
• The IRS should have applied the updated filters to tax returns that were previously screened using old criteria. Through July 20, 2023, the IRS failed to identify 997 returns reporting $19.6 million in possibly erroneous ERC.
• Through June 29, 2023, the IRS doubled the threshold and changed the referral criteria to include only returns that met specific return scenarios. However, these decisions led to 184,923 returns claiming $41.8 billion in ERC from being considered for possible pre-refund examination.
• A review of over 1.9 million ERC claims processed by the IRS from Nov. 7, 2022 to June 29, 2023 identified 139,993 and 44,930 ERC claims from tax years 2020 and 2021 totaling $22.3 billion that exceeded the IRS’s updated threshold for referral.
• An additional 923 entities claimed ERC worth $105 million, which should have received a disallowance letter but was not initially identified by the IRS.
As a result of these findings, TIGTA made four recommendations. The suggestions included the IRS reviewing the 997 tax returns not flagged by identity theft filters and the 184,923 tax returns not considered by the IRS for possible pre-refund examination. The TIGTA also recommended that the IRS review the 139,993 and 44,930 ERC claims from tax years 2020 and 2021. It suggested that the IRS consider all these returns for post-refund compliance review to recover any potentially erroneous ERC paid.
In addition, TIGTA recommended that the IRS send disallowance letters to the 923 entities that did not initially receive a letter.
TIGTA also said that the IRS should ensure that any subsequent analysis to identify businesses for recapture letters uses accurate wage data. They should also consider lessons learned from the 2020 tax year recapture letters.
The IRS agreed with three recommendations and plans to review and refer added tax returns that met its updated identity theft filters for recapture where appropriate, issue disallowance letters to the 923 entities TIGTA identified and update its strategy to identify businesses for ERC recapture in subsequent years.
The IRS partially agreed to review the 184,923 tax returns, citing competing priorities and resource and time considerations.