Small Business Taxes & Management

Special Report

IRS Finds Many Risky Economic Recovery Credit Claims


Small Business Taxes & ManagementTM--Copyright 2024, A/N Group, Inc.




We've talked about the Economic Recovery Credit before. It was a credit on payroll taxes designed to help employers maintain employees on the payroll during the Covid pandemic, but a business had to meet certain requirements to claim the credit. The credit spawned a host of promoters who promised significant (and in some case huge) refunds that were well in excess of the amount the taxpayers were truly entitled to. The IRS has been reviewing the claims for a number of months and has released a report on the status.

Following a detailed review to protect taxpayers and small businesses, the IRS announced plans to deny tens of thousands of improper high-risk Employee Retention Credit claims while starting a new round of processing lower-risk claims to help eligible taxpayers.

"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. "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. 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.

The review involved months of digitizing information and analyzing data since last September to assess a group of more than 1 million Employee Retention Credit (ERC) claims representing more than $86 billion filed amid aggressive marketing last year.

During this process, the IRS identified between 10% and 20% of claims fall into what the agency has determined to be the highest-risk group, which show clear signs of being erroneous claims. Tens of thousands of these will be denied in the weeks ahead. 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 analysis also estimates between 60% and 70% of the claims show an unacceptable level of risk. For this category of claims with risk indicators, the IRS will be conducting additional analysis to gather more information with a goal of improving the agency’s compliance review, speeding resolution of valid claims while protecting against improper payments.

At the same time, the IRS continues to be concerned about small businesses waiting on legitimate claims, and the agency is taking more action to help. Between 10% and 20% of the ERC claims show a low risk. For those with no eligibility warning signs that were received prior to the last fall's moratorium, the IRS will begin judiciously processing more of these claims.Low-risk payments will begin going out later this summer, but at a much slower pace than during the pandemic.


No Additional Action Needed by Taxpayers at this Time--Await Further Notification From IRS

The IRS cautioned taxpayers who filed ERC claims that the process will take time, and the agency warned that processing speeds will not return to levels that occurred last summer. Taxpayers with claims do not need to take any action at this point, and they should await further notification from the IRS. The agency emphasized those with ERC claims should not call IRS toll-free lines because additional information is generally not available on these claims as processing work continues.

“These complex claims take time, and the IRS remains deeply concerned about how many taxpayers have been misled and deluded by promoters into thinking they’re eligible for a big payday. The reality is many aren’t,” Werfel said. “People may think they are on safe ground, but many are simply not eligible under the law. The IRS continues to urge those with pending claims to use this period to review the guideline checklist on, talk to a legitimate tax professional rather than a promoter and use the special IRS withdrawal program when there’s an issue.”

Werfel also cautioned taxpayers to be wary of promoters using this announcement as a springboard to attract more clients to file ERC claims.


Steps taken since September 2023 when processing moratorium on new ERC claims began

During the ERC review period, the IRS continued to process claims received prior to September 2023. The agency processed 28,000 claims worth $2.2 billion and disallowed more than 14,000 claims worth more than $1 billion. That's about a 50% rejection rate both in claims and money.

To counter the flood of claims being driven by promoters, the IRS announced last fall a moratorium on processing claims submitted after Sept. 14, 2023, to give the agency time to digitize information on the large study group of nearly 1 million ERC claims, which are made on amended paper tax returns. The subsequent analysis of the results during this period helped the IRS evaluate next steps, providing the IRS valuable information to change the way the agency will process ERC claims going forward. The findings of the IRS review confirmed concerns raised by tax professionals and others that there was an extremely high rate of improper ERC claims.

The claims followed a flurry of aggressive marketing and promotions last year that led to people being misled into filing for the ERC. After the moratorium was put in place on Sept. 14, the IRS has continued to see ERC claims continuing to come in at the rate of more than 17,000 a week, with the ERC inventory currently at 1.4 million.

In light of the large inventory and the results of the ERC review, the IRS will keep the processing moratorium in place on ERC claims submitted after Sept. 14, 2023. The IRS will use this period to gather additional feedback from partners, including Congress and others, on the future course of ERC.


Special IRS Withdrawal Program remains open for those with unprocessed ERC claims

Given the large number of questionable claims indicated by the new review, the IRS continues to urge those with unprocessed claims to consider the special IRS ERC Withdrawal Program to avoid future compliance issues. Businesses should quickly pursue the claim withdrawal process if they need to ask the IRS to not process an ERC claim for any tax period that hasn’t been paid yet. Taxpayers who received an ERC check--but haven’t cashed or deposited it--can also use this process to withdraw the claim and return the check. The IRS will treat the claim as though the taxpayer never filed it. No interest or penalties will apply.

With more than 1.4 million unprocessed ERC claims, the claim withdrawal process remains an important option for businesses who may have submitted an improper claim.


IRS compliance work tops $2 billion from Voluntary Disclosure Program, withdrawal process, disallowances

The IRS also reports that compliance efforts around erroneous ERC claims have now topped more than $2 billion since last fall. This is nearly double the amount announced in March following completion of the special ERC Voluntary Disclosure Program (VDP), which the IRS announced led to the disclosure of $1.09 billion from over 2,600 applications. The IRS is currently considering reopening the VDP at a reduced rate for those with previously processed claims to avoid future compliance action by the IRS.

The IRS is currently assessing whether to reopen the special ERC Voluntary Disclosure Program to help taxpayers get into compliance on paid claims and avoid future IRS compliance action, including audits. If the program reopens, the IRS anticipates the terms will not be as favorable as the initial offering that closed in the spring. A decision will be made in coming weeks.

The IRS is also reminding those with pending claims or considering submitting an ERC claim about other compliance actions underway:

Criminal investigations: As of May 31, 2024, IRS Criminal Investigation has initiated 450 criminal cases, with potentially fraudulent claims worth nearly $7 billion. In all, 36 investigations have resulted in federal charges so far, with 16 investigations resulting in convictions and seven sentencings with an average sentence of 25 months.

Audits: The IRS has thousands of ERC claims currently under audit.

Promoter investigations: The IRS is gathering information about suspected abusive tax promoters and preparers improperly promoting the ability to claim the ERC. The IRS’s Office of Promoter Investigations has received hundreds of referrals from internal and external sources. The IRS will continue civil and criminal enforcement efforts of these unscrupulous promoters and preparers.


Help for Businesses with Eligibility Questions and Those Misled by Promoters

Some promoters told taxpayers every employer qualifies for ERC. The IRS and the tax professional community emphasize that this is not true. Eligibility depends on specific facts and circumstances. The IRS has dozens of resources to help people learn about and check ERC eligibility and businesses can also consult their trusted tax professional. Key IRS materials to help show taxpayers if they have a risky ERC claim include:


Copyright 2024 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536

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--Last Update 06/21/24