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IRS enters next stage of Employee Retention Credit work; review indicates vast majority show risk of being improper

Highest-risk claims being denied; additional processing to begin on low-risk claims; heightened scrutiny and review continue as compliance work tops $2 billion; IRS will consult with Congress on potential legislative action before making a decision on the future of the moratorium.

On Thursday, June 20, 2024, the IRS issued long-awaited guidance on the processing of unpaid ERC claims and provided an update on its efforts to reduce ERC fraud.

Since imposing a moratorium on processing ERC refund claims last September, the IRS has reviewed more than 1 million ERC claims representing more than $86 million and identified significant discrepancies, which led them to categorize these claims based on risk level. The review found that 10-20% of the claims are clearly ineligible and will be denied. Another 60-70% of claims exhibit risk indicators and will require additional analysis to ensure compliance. Only 10-20% of the claims appear legitimate and will be processed with heightened scrutiny to protect against improper payments.

The IRS plans to deny tens of thousands of high-risk claims and commence processing of low-risk claims at a slower pace to ensure accuracy. Moreover, thousands of ERC claims are currently under audit, and the IRS is gathering information about suspected abusive tax promoters and preparers improperly promoting the ability to claim the ERC. The IRS will continue civil and criminal enforcement efforts against these unscrupulous promoters and preparers.

The IRS will begin processing the 10-20% of ERC claims that show a low risk (generally the oldest first), with payments in this group to be sent later this summer, but at a dramatically slower pace given the need for increased scrutiny.

The IRS will maintain a moratorium on processing new ERC claims submitted after September 14, 2023. This decision is intended to prevent further improper claims and allow the agency to consult with Congress on potential legislative actions regarding the future of the ERC program. The IRS is also considering reopening its Voluntary Disclosure Program to help taxpayers rectify improperly processed claims, although the terms may be less favorable than the initial offering.

Tanner Thoughts

This is welcome news for clients awaiting refund checks, albeit belated, indefinite, and unclear. Clients with older claims may start receiving their checks later this summer; unfortunately, the IRS didn’t indicate what constitutes an “older claim.” We have clients with claims unpaid for over two years and others approaching a year, nor did they define “later this summer”—is that July, August, or September? Clients should not expect quick payment, as the IRS stated the review process would continue more slowly and thoroughly than in the past. If the process took 4-8 months previously, how much slower will it be now? Taxpayers who submitted ERC claims after September 14, 2023, will still reside in limbo awaiting further IRS action.

If you have questions about your refund claim, please contact Shawn Marchant smarchant@tannerco.com or Matt Neuenswander mneuenswander@tannerco.com.