Publish Date
Jul 17, 2024
Expertise
In a significant move to safeguard taxpayers and small businesses, the Internal Revenue Service (IRS) has unveiled plans to deny tens of thousands of improper high-risk Employee Retention Credit (ERC) claims. Concurrently, the agency will initiate a new processing round for lower-risk claims to ensure eligible taxpayers receive their due benefits.
Protecting Taxpayers and Ensuring Compliance
“The completion of this review provided the IRS with new insight into risky Employee Retention Credit activity and confirmed widespread concerns about a large number of improper claims,” stated IRS Commissioner Danny Werfel.
“We will now use this information to deny billions of dollars in clearly improper claims and begin additional work to issue payments to help taxpayers without any red flags on their claims,” the Commissioner said.
The IRS’s meticulous review, which spanned several months, involved digitizing and analyzing data from over 1 million ERC claims, representing more than $86 billion. This extensive process revealed that between 10 percent and 20 percent of these claims fall into the highest-risk category, showing clear signs of being erroneous. These high-risk claims, which do not align with the guidelines established by Congress, will be denied in the coming weeks.
Addressing Lower-Risk Claims
While addressing high-risk claims, the IRS is also focusing on legitimate claims from small businesses. Between 10 percent and 20 percent of the ERC claims are considered low-risk. For these claims, which show no eligibility warning signs and were received before last fall’s moratorium, the IRS will begin processing them judiciously. The first payments for this group are expected to be issued later this summer, albeit at a slower pace than during the pandemic period due to increased scrutiny.
Ongoing Compliance Efforts
The IRS’s analysis also indicates that between 60 percent and 70 percent of the claims show an unacceptable level of risk. For these claims, the IRS will conduct additional analysis to gather more information, aiming to improve compliance review and expedite the resolution of valid claims while preventing improper payments.
As part of the ongoing compliance efforts, the IRS will prioritize processing the oldest claims first. Claims submitted during the moratorium period will not be processed at this time. Additionally, claims with calculation errors will undergo a final review, and the claimed amounts will be adjusted before payment.
No Immediate Action Required From Taxpayers
Taxpayers with pending ERC claims are advised to remain patient, as the processing of these complex claims will take time. The IRS has emphasized that taxpayers do not need to take any action at this point and should await further notification from the agency. Calling IRS toll-free lines for updates on ERC claims is discouraged, as additional information is generally not available.
“These complex claims take time, and the IRS remains deeply concerned about how many taxpayers have been misled and deluded by promoters into thinking they’re eligible for a big payday. The reality is many aren’t,” Werfel said.
“People may think they are on safe ground, but many are simply not eligible under the law. The IRS continues to urge those with pending claims to use this period to review the guideline checklist on IRS.gov, talk to a legitimate tax professional rather than a promoter, and use the special IRS withdrawal program when there’s an issue,” he said.
Future Legislative Actions
Before making any decisions on the future of the moratorium, the IRS will consult with Congress on potential legislative actions. This collaborative approach aims to ensure that any future measures are well-informed and effective in protecting taxpayers and maintaining compliance.
For further guidance, please contact a member of our Credits and Incentives team who can provide tailored advice based on the latest IRS updates. For more updates and detailed guidance on tax credit and incentive-related matters, subscribe to our blog: Tax Compass.
