Don't Mess With Taxes

In addition to moving more valid Employee Retention Credit (ERC) payments through the system, the Internal Revenue Service says it has stopped $5 billion invalid claims of the business tax credit.

The Employee Retention Credit (ERC) saga continues, this time with some good news for businesses awaiting the benefits of the tax credit.

The ERC was created in 2020 to help businesses and their staff stay afloat during the COVID-19 pandemic. But a rash of recent claims, many of them questionable filings encouraged by aggressive ERC promoters, created problems for the Internal Revenue Service and legitimate claimants.

The IRS instituted a series of steps to discover, and disallow, improper filings. Today, the tax agency announced it had done that, to the tune of stopping $5 billion in invalid ERC claims.

Plus, the tax agency also has moved more correct ERC filings — around 50,000 — through the system. Those business taxpayers should get the tax credit money for which they qualify next month.

IRS making ERC claim progress: IRS Commissioner Danny Werfel today announced the progress his agency is making in resolving the complicated ERC filings situation.

It’s been a long process, with efforts offering affected businesses both carrots and sticks.

The IRS allowed filers to repay wrong ERC amounts they received, and gave those who hadn’t received credit money from wrong filings the option to with draw their claims.

The tax agency began auditing returns where it found ERC red flags, as well as pursuing civil action and criminal investigations. So far, 460 criminal cases of potential credit fraud and abuse have been initiated.

And last fall, the IRS placed a moratorium on the processing of new ERC claims filed after Sept. 14, 2023.

Now, the tax agency is accelerating its examinations of the complex filings, moving more of the returns into the processing pipeline.

Specifically, Werfel noted that the IRS now has identified 50,000 valid ERC filings. These filings were part of what the IRS identified as low-risk claims. In the coming weeks, those legitimate ERC claimants should soon receive the money for which they qualify.

How soon? The IRS projects payments will begin in September, with additional payments going out in subsequent weeks. The IRS anticipates adding another large block of additional low-risk claims for processing and payment in the fall.

More ERC filings to be processed: In addition, the IRS is moving its moratorium on processing new claims from Sept. 14, 2023, to Jan. 31, 2024. That should get more legitimate returns, and payouts, through the agency’s system.

Like the rest of the ERC inventory, the IRS said it 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 Werfel.

The process to cull valid claims from invalid ones has been time-consuming, added Werfel, noting that IRS personnel have “maintained a steady cadence of both ERC approvals and disapprovals.”

$5 billion in incorrect claims caught: As for those disallowed ERC claims, the IRS said that in recent weeks it has sent out 28,000 disallowance letters to businesses whose claims showed a high risk of being incorrect.

The IRS estimates that those disallowances will prevent up to $5 billion in improper payments.

However, the agency also acknowledged that tax professionals have raised concerns about potential errors. Werfel said that the IRS is still evaluating the results of this first significant wave of disallowances in 2024, but early indications indicate errors are relatively isolated. More than 90 percent of the disallowance notices were validly issued, according to the IRS review.

The IRS said it will continue to stay in touch with the tax community and monitor the situation. It will make any adjustments necessary to minimize burdens on businesses, such as adjusting processes and filters for determining invalid claims following each wave of disallowances.

The IRS also noted that in limited cases where claims can be proven to have been improperly denied, the agency will work with taxpayers to get it right.

Businesses that get an ERC denial letter have options, including filing of an administrative appeal by responding back to the address on the denial letter. IRS.gov has more information on requesting an administrative appeal with the IRS independent Office of Appeals.

You also might find these items of interest:

• Tips if the IRS audits your business' ERC claim
• 5 new warning signs your ERC claim might be wrong
• Some ERC payments could go out later this summer, says IRS

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