By Alicia Holloway, CPA
The IRS has finally made some movement on those long-awaited Employee Retention Credits (ERC) claims. Since the credit became available at the start of the pandemic, the IRS has been struggling with processing its backlog of ERC filings and determining which claims are valid. The IRS issued a moratorium on September 14, 2023, which paused the processing of all claims filed after that date, and even claims filed before that date were extremely slow to be processed. The moratorium was originally expected to end by December 31, 2023, but until recently, it remained in place. Below are various updates that the IRS has announced in recent weeks. While some still criticize the IRS for not doing enough, it is a step in the right direction, especially for businesses counting on this credit.
June Announcements
IRS ERC Claim Categories
Following a detailed review of ERC claims filed in June, the IRS announced it had grouped the claims into three categories – high-risk, unacceptable risk and low-risk claims. 10-20% were identified as the highest risk. 60-70% were identified as having an unacceptable level of risk. This leaves only 10-20% in the low-risk category. The IRS will handle each category differently, ultimately determining whether the claim will be processed, rejected, or sent for further review.
- High-Risk Group: The IRS believes that the high-risk group of ERC claims show “clear signs of being erroneous.” The IRS plans to deny these claims.
- Unacceptable Level of Risk Group: The IRS did not provide much detail beyond identifying this group but described a process where certain risk factors are identified, and if a claim has too many of them, it is moved to this category. Due to the complexity of the claims process, further investigation needs to be conducted to determine if these claims were purposely fraudulent or erroneous without ill intent.
- Low-Risk Group: These claims showed no sign of risk and should be processed. Payments in this category have started being processed, although at a very slow pace if filed prior to the moratorium (and will start again for claims filed before January 31, 2024 – see below).
IRS Investigations Status
There are currently thousands of ERC claims under audit by the IRS. As of the end of June, the Criminal Investigation division of the IRS had initiated 460 criminal cases that are estimated to include fraudulent claims totaling $7B. 37 of these investigations have resulted in Federal charges with 17 convictions. Many more convictions are expected.
August IRS Announcements
Lifting of the Moratorium
On August 8th, the IRS announced the moratorium was being lifted for claims filed between September 14, 2023, and January 31, 2024. Claims filed during this period will be assigned to agents for review and begin being processed. This end date corresponds with the date used in The Tax Relief for American Families and Workers Act, which would have ended ERC filings on January 31, 2024, if passed. It passed the House on January 31, 2024, but failed to pass the Senate on August 1, 2024. It is currently unclear what will happen to claims filed after January 31, 2024.
Update on Denied and Processed Claims
The August 8th announcement stated that 50,000 valid, low-risk claims were being processed and that payment should be received shortly.
The IRS also announced on this date that 28,000 notifications of denied claims would be sent out, totaling about $5B of improper claims. The IRS estimates that 90% of denied claims are proper, but tax professionals who reviewed these denials believe the percentage may be overstated. The IRS has limited information to make these decisions since no support was required to be provided with the claim to prove a taxpayer qualified for the credit. It is recommended to immediately seek a tax professional’s help to determine whether a denied claim is accurate or an appeals process should be started. There is a limited time to appeal the decision, so taxpayers should not delay. It was noted that the first round of these denial letters did not include language regarding an appeal process being available to taxpayers, which was incorrect and should have been included.
On August 15th, the IRS announced that 30,000 notices to reverse and recapture previously paid improper claims will be sent out this Fall.
Re-Opening of the Voluntary Disclosure Program
On August 15th, the IRS announced the Voluntary Disclosure Program (VDP) would re-open through November 22, 2024 for 2021 claims only. It had previously been open but ended on March 22, 2024. This program is for ineligible claims that have already been received and cashed. The reopened program requires 85% credit repayment (versus the 80% in the original VDP). Filing under this program protects taxpayers from the IRS assessing penalties and interest under future audits. To file under the VDP, the taxpayer must not currently be under audit or have received any of the above audit notices or denials. Form 15434 must be filed through the IRS’s upload tool to apply. The previous VDP was used by 2,600 applicants for almost $1.1B of claims.
ERC Withdrawal Program Still Open
Those who wish to withdraw their unprocessed ERC claims can still use the special IRS ERC Withdrawal Program. This process allows businesses to avoid future compliance issues by requesting the IRS not process an ERC claim for any tax period that has not been paid yet. Taxpayers who received an ERC check but have not cashed or deposited it can also use this process to withdraw the claim and return the check. Per the IRS, 7,300 entities have used this program for $677M of claims.
Statute of Limitation Issues for Amended Returns
As part of claiming the ERC, taxpayers were required to reduce the wage expense on their income tax return for the year the credit was claimed. This reduction of wage expense would have resulted in additional income tax being due. The reduction of wage expense may have been done on an originally filed 2020/2021 income tax return or on an amended 2020/2021 return or Administrative Adjustment Requests (AARs). Taxpayers that utilize the Voluntary Disclosure Program or Withdrawal Program or are denied the ERC by the IRS would want to amend their tax return(s)/file an AAR to get the income tax paid on the ERC refunded to them. They may run into issues with the statute of limitation, though.
The statute of limitations for amended filings is 3 years from the initial due date of the return or when the return was actually filed if it was extended. For 2020 returns that were timely filed, the statute closed on April 15, 2024. Even if the 2020 return was extended, the statute may have already closed or will close soon. For periods that have not yet closed, taxpayers may want to consider filing a protective claim if the taxpayer is unsure the ERC will be received. A protective claim is filed to preserve the taxpayer’s right to claim a refund when their right to the refund is contingent on future events and may not be determinable until after the statute of limitations expires.
Processing Speeds and Next Steps
The IRS cautions taxpayers who filed ERC claims that the process will take time and that no additional action is needed from taxpayers at this point. The agency warns that processing speeds will not return to the levels seen last summer and advises taxpayers to refrain from calling IRS toll-free lines for status updates on their claims.
Seek the Advice of a Tax Professional
The IRS continues to warn taxpayers who have knowingly misled the service to review the guideline checklist and talk to a tax professional for guidance.
At Rivero, Gordimer & Company, we have been helping clients navigate the complexities of tax planning, preparation, and submission for more than 40 years. For more information about how our office can help you through this uncertain time, visit our website or contact us at 813-875-7774.
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