IRS Moves Forward with Employee Retention Credit Claims

The Internal Revenue Service (IRS) has announced new measures to support small businesses and prevent improper payments under the Employee Retention Credit (ERC) program. These actions include accelerating payments for eligible claims while continuing to enforce compliance on this complex credit, which saw a surge in claims due to misleading marketing.

The IRS is actively addressing improper ERC claims, ramping up audits, and pursuing both civil and criminal investigations into potential fraud and abuse. A review conducted by the IRS, which was announced in June, confirmed the concerns of tax professionals and others about the high rate of improper ERC claims currently in the system.

Recently, the IRS issued 28,000 disallowance letters to businesses whose claims were deemed high-risk. This effort is expected to prevent up to $5 billion in improper payments. In addition, thousands of audits are ongoing, and 460 criminal cases have been initiated. Meanwhile, the IRS has identified 50,000 valid ERC claims and is prioritizing these for payment processing, ensuring that businesses with legitimate claims receive their funds in the coming weeks.

Given the complexity of the ERC, the IRS is proceeding carefully with both disallowances and additional payments, balancing the need to support businesses with legitimate claims against the wave of improper claims driven by aggressive marketing.

Initially established to aid businesses during the pandemic, the ERC program later became a target for aggressive and potentially predatory marketing practices. Some promoters even rebranded the credit under different names, such as grants or business stimulus payments, which contributed to the surge in claims.

To manage the influx of claims, the IRS implemented a moratorium on processing claims submitted after September 14, 2023, allowing time to digitize and review the large volume of ERC claims made on amended paper tax returns. This analysis has provided the IRS with critical information to improve the accuracy of ERC claim processing moving forward.

Following the moratorium, the IRS is now entering a new phase of the program, focusing on both payments and disallowances. The IRS will also maintain close communication with the tax professional community to navigate the complexities of the ERC landscape.

In its latest update, the IRS announced that 50,000 low-risk ERC claims will be processed and paid out quickly, with payments beginning in September and continuing in the following weeks. The IRS plans to add more low-risk claims for processing and payment in the fall.

Additionally, the IRS has adjusted its approach to the moratorium on new claims. While claims submitted after September 14, 2023, were previously not processed, the IRS will now start processing claims filed between September 14, 2023, and January 31, 2024, focusing on those at the highest and lowest risk levels. This means that some claims from this period may be acted upon if there is a solid basis to pay or deny them.

The IRS’s compliance efforts on ERC claims are ongoing, including intensified audits and investigations into promoters and criminal activities. Notable initiatives include:

• ERC Claim Withdrawal Program: Over 7,300 entities have withdrawn $677 million in unprocessed ERC claims.
• ERC Voluntary Disclosure Program: This program, which ended in March, saw over 2,600 applications from ERC recipients disclosing $1.09 billion worth of credits.
• Criminal Investigations: As of July 1, 2024, the IRS Criminal Investigation division has initiated 460 criminal cases involving nearly $7 billion in potentially fraudulent claims, with 37 investigations leading to federal charges.
• Promoter Investigations: The IRS is actively investigating tax promoters and preparers suspected of improperly promoting the ERC. The IRS will continue to pursue civil and criminal enforcement against these individuals.
• Audits: Thousands of ERC claims are currently under audit by the IRS.

Source: IRS.gov