IRS Provides Update on Employee Retention Credit (ERC)

AAFCPAs would like to make clients aware that, on June 20, 2024, the IRS announced its plans to deny tens of thousands of improper, high-risk Employee Retention Credit (ERC) claims. Concurrently, the agency is processing a new round of lower-risk claims using insight gleaned from its initial review to expedite payments to taxpayers who filed legitimate claims.

IRS Commissioner Danny Werfel highlighted the complexity involved in the ERC and the agency’s efforts to pinpoint and deny billions in improper claims. The review process, which was launched last September, involved digitizing and analyzing more than one million ERC claims worth more than $86 billion.

During this process, the IRS identified 10 to 20 percent of ERC claims as high-risk, e.g., showing clear signs of being erroneous. These claims will be denied in the coming weeks. An additional 60 to 70 percent of claims fall into an unacceptable risk category and will undergo further analysis to improve compliance and expedite legitimate claims.

Between 10 and 20 percent of ERC claims are considered low-risk and will be prioritized. The IRS has not disclosed their risk determination methodology at this time.

Despite concerns, the IRS is committed to assisting small businesses with valid claims and is taking action to help. The agency plans to work on the oldest claims first, with no claims submitted during the moratorium period being processed at this time. The first payments for valid claims are expected to be issued later this summer but at a slower pace than taxpayers experienced during the pandemic due to the need for increased scrutiny. Taxpayers who filed ERC claims should note that the process will take some time.

The IRS has been processing claims received before the September 2023 moratorium, which has resulted in the approval of 28,000 claims worth $2.2 billion and the disallowance of more than 14,000 claims worth more than $1 billion. The moratorium remains in place to manage the large volume of claims and to prevent a surge of improper filings. Since last fall, IRS compliance efforts have topped $2 billion, nearly double the amount announced in March following the completion of the special ERC Voluntary Disclosure Program. The IRS has considered reopening this program at a reduced rate for those with previously processed claims to help taxpayers avoid future compliance actions.

To counter questionable claims, the IRS continues its ongoing claims withdrawal process while gathering feedback from partners, including Congress and others, on the future course of the ERC. In addition, it continues its criminal investigations on fraudulent claims, which are estimated to be worth nearly $7 billion, along with civil and criminal enforcement efforts against abusive promoters and preparers.

Next Steps

AAFCPAs advises that clients consider the burden currently placed on the IRS as it investigates claims. The agency emphasized that those with ERC claims should not call IRS—as processing work continues—and should instead await further notification from the IRS. We advise that clients who consulted with AAFCPAs to file their claim wait until further notice from the IRS. We will continually update you as changes in the process are announced.

Those with claims still unprocessed but prepared by companies other than AAFCPAs, e.g., completed by themselves or by a mill, are urged to consider the special IRS ERC Withdrawal Program to avoid noncompliance and to request that the IRS halt processing of any ERC claim for tax periods that have not yet been paid. This program allows businesses to withdraw improper claims without penalties.

If you have questions, please contact Kaite Noll, CPA, Manager at 774.512.4138 or knoll@nullaafcpa.com, Courtney McFarland, CPA, MSA, 340B Apexus Certified Expert™ at 774.512.4051 or cmcfarland@nullaafcpa.com—or your AAFCPAs Partner.