The Internal Revenue Service has adjusted its moratorium on processing Employee Retention Tax Credit (ERC) claims, announcing last week it will begin processing claims filed between September 14, 2023 and January 31, 2024. In addition, the agency plans next month to begin paying 50,000 ERC claims it characterizes as “low risk” while continuing with audits and promoter and criminal investigations.
Background
The ERC is a legitimate, refundable tax credit designed to help businesses that continued to pay employees while they were shut down because of the COVID-19 pandemic or that experienced a significant decline in gross receipts in 2020 or 2021. While Congress designed the ERC with the laudable goal of helping businesses survive the pandemic while encouraging them to keep employees on the payroll, ERC fraud has run rampant and unscrupulous promoters have pushed businesses that do not qualify for the credit to file improper claims. For almost two years, the IRS has engaged in a concerted effort to stamp out fraudulent ERC claims.
Moratorium on Processing Claims Shifts
On September 15, 2023, the IRS initiated a moratorium on processing new ERC claims in order to digitize previously filed claims and to stem rampant ERC fraud driven by certain promoters aggressively marketing the credit to unsuspecting businesses. We previously wrote about the moratorium here.
On August 8, 2024, however, the IRS announced that it would begin processing some high- and low-risk ERC claims filed during the moratorium. Taxpayers who filed claims between September 14, 2023, and January 31, 2024 may receive payments (or denials) for some quarters while the IRS continues to review other quarters for eligibility, as eligibility can vary from quarter to quarter based on a variety of factors.
The IRS will continue to refrain from processing claims filed after January 31, 2024, based upon its evident hope that the Senate will pass the Tax Relief for American Families and Workers Act of 2024, which would retroactively end the ERC program entirely as of January 31, 2024. Under current law, ERC claims for 2021 can be filed until April 15, 2025. We previously wrote about this legislation here and here.
IRS to Pay 50,000 Claims
Starting in September, the IRS will begin paying 50,000 ERC claims that it determined are low risk. The IRS anticipates it will process and pay another large block of low-risk ERC claims in the fall. Since the IRS has not been processing ERC claims filed during the moratorium, the first group of 50,000 claims will likely be claims filed before September 14, 2023.
The IRS has taken a two-prong approach to processing ERC claims. In late 2023 and early 2024, it sent out batches of disallowance letters to businesses whose claims it perceived as high risk and not eligible for the credit. In recent weeks, the IRS mailed another batch of 28,000 rejection letters. The IRS will now start issuing payments for low-risk claims, which leaves taxpayers with medium risk claims in limbo. These businesses will be the last to have their claims processed.
The IRS has not announced a timeline to resolve the enormous backlog of unprocessed ERC claims. In June, the IRS had almost 1.4 million unprocessed ERC claims, with 880,000 filed before the moratorium and roughly 500,000 filed since September 14, 2023. Even with the recent announcements to pay low-risk claims and deny additional high-risk claims, at least 1.3 million claims remain unprocessed. Given the complexity of the credit, the IRS is moving methodically and deliberately as it processes claims, and it will take many months, if not years, to resolve the backlog. The IRS’ glacial pace of processing claims has spurred a growing number of businesses to file refund lawsuits in hopes of obtaining ERC payments quicker. We wrote here that businesses with unprocessed claims should consider filing refunds suits.
Audits and Promoter and Criminal Investigations Continue
The IRS has begun thousands of intensive audits, and it has initiated 460 criminal investigations representing nearly $7 billion in potentially fraudulent claims. To date, 37 criminal investigations have resulted in federal charges. While more than half of the 37 cases are pending, 17 investigations resulted in convictions and courts have handed down nine sentencings averaging 20 months of imprisonment each. The IRS has boasted about its 100% conviction rate in criminal ERC investigations. Meanwhile, the IRS continues to gather information about suspected abusive tax promoters and preparers. The Office of Promoter Investigations has received hundreds of referrals, and it is only a matter of time before a prominent promoter is criminally charged.
The Takeaway
The IRS is finally starting to process some ERC claims filed during the moratorium and will begin paying a batch of eligible claims soon. However, based on the current backlog, many businesses will have to wait months or years for their claims to be processed.
At the same time, the IRS is intensifying civil and criminal enforcement efforts to target unscrupulous promoters and preparers. All ERC claimants should consult with a trusted tax professional to review their eligibility and consider their refund options. Tax consultants and preparers that advised clients on ERC claims should also consult legal counsel before being contacted by the IRS.
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