The Employee Retention Credit (ERC) was created to help businesses stay afloat and keep staff on the payroll during the height of the COVID-19 pandemic. Basically, this tax credit’s benefits — thousands of dollars per employee that eligible companies kept paying — were for the 2020 and 2021 tax years.
It has turned into a major tax headache, for both businesses and the Internal Revenue Service.
But, says the IRS, it has made progress on evaluating the plethora of claims filed after the pandemic’s peak. And it has some good news for small businesses that filed legitimate ERC claims.
The IRS is starting to process these filings, which it has dubbed low-risk, and the associated correct credit payments should start going out later this summer.
As for those who filed what the IRS says clearly fall outside the guidelines established by Congress, the news is not so good. The agency says tens of thousands of these dubious claims will be denied in the weeks ahead.
ERC complications’ history: Like many tax laws, the good intentions get swamped by complicated provisions, filer confusion, and schemers trying to make money off of taxpayers’ very real financial and tax issues.
The ERC benefit was ripe for being hijacked by aggressive ERC promoters and credit mills, who in many cases urged business owners to file questionable claims. This prompted the IRS last September to stop accepting new claims.
The agency also started taking closer looks at last year’s increased claims, slowing down their processing. In the case of 20,000-plus ERC filings, the IRS sent those claimants disallowance letters.
The IRS also allowed business that discovered or believed they had filed an improper ERC to help themselves (and the tax collector) by voluntarily withdrawing flawed claims.
Now, says the IRS, it is entering yet another phase of ERC work.
Lower-risk claims now on the table: Following what the IRS describes as a detailed review of the ERC situation, its leaders announced today that the agency will deny tens of thousands of improper high-risk ERC claims.
Simultaneously, added the IRS, it will start a new round of processing lower-risk, properly filed tax credit claims.
“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,” said IRS Commissioner Danny Werfel in the announcement.
“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,” added IRS commissioner.
Denials on the way for bad claims: The IRS started assessing more than 1 million ERC claims last fall, which involved months of digitizing information and analyzing data. Those claims, according to the agency, represented more than $86 billion in filings, largely due to the promoters’ aggressive marketing last year.
Of those 1+ million claims, the IRS said it identified between 10 percent and 20 percent that fell into what it determined to be the highest-risk group. These are ERC claims that the IRS says show clear signs of being erroneous.
Tens of thousands of these will be denied in the weeks ahead, said the IRS. This high-risk group includes filings with warning signals that clearly fall outside the guidelines established by Congress.
In addition to this highest risk group, the IRS said its analysis also found an estimated 60-to-70 percent of the claims showed an unacceptable level of risk.
For this category of ERC claims with risk indicators, the IRS said it will conduct additional analysis to gather more information that should improve the agency’s compliance review, protect against improper payments, and speed resolution of valid credit claims.
Better news for small business ERC claims: The IRS says it also will focus now on small businesses that filed legitimate claims for which they are still waiting. These so-called low-risk ERC claims account for between 10 percent and 20 percent of the coronavirus pandemic credit filings the IRS has analyzed.
For those with no eligibility warning signs that were received prior to the last fall’s moratorium, the IRS says it “will begin judiciously processing more of these claims.”
The IRS anticipates some of the first payments in this group will go out later this summer.
However, the agency also emphasized that the increased scrutiny required of the more recent ERC filings means that current legitimate credit payments will go out at a dramatically slower pace than payments issued during the actual pandemic period.
As the additional IRS processing work begins at, in the IRS’ words, a measured pace, other claims will begin being paid later this summer following a final review. The IRS also noted that generally the oldest claims will be worked first.
The IRS says these low-risk ERC claims need additional review because of possible calculation errors made during the complex filings. For those claims with calculation errors, the amount claimed will be adjusted before payment.
Finally, said the IRS, it still is not processing any ERC claims submitted during the moratorium period.
“This is one of the most complex credits the IRS has administered, and we continue to ask taxpayers for patience as we unravel this complex process,” Werfel added. “Ultimately, this period will help us protect taxpayers against improper payouts that flooded the system and get checks to those truly eligible.”
You also might find these items of interest:
- Tips if the IRS audits your business' ERC claim
- 7 warning signs you filed an incorrect ERC claim
- W&M members want ERC backlog answers from IRS
- IRS ERC compliance efforts tops $1 billion (March 24, 2024)
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