Coinciding with the opening day of the Olympic games, the IRS issued IR-2024-198, again stating that it will deny tens of thousands of ERC claims that, according to the IRS at least “show clear signs of being erroneous,” which adds to the 20,000 ERC claim disallowance letters mailed in December 2023. The IRS also identified five (5) new red flags for taxpayers to look out for with respect to incorrect ERC claims. Those five red flags are in addition to the seven problem areas for ERC claims that the IRS identified in February 2024. This press release heralded the beginning of the ERC Olympic games for many claimants who have been waiting months for a response to their claims.
The International Olympic Committee (IOC) delayed the Olympic triathlon while waiting for the water quality to improve. So too, the IRS wanted a delay to digitize records and get a handle on the claims previously filed so that the claims could be carefully reviewed and either pay or deny the claims. Instead, the IRS started issuing scant boilerplate denial letters en masse, which appear to have been given little or no substantive review and omit basic and important taxpayer rights. Much like the Seine for Olympic triathletes, this left a bad taste in the mouth of many tax practitioners.
On the same day of the first ever US Women’s Rugby medal, a District Court issued a 39-page order denying the plaintiff the gold they wanted (preliminary injunction) but awarded the bronze with some taxpayer-favorable language and made clear the IRS cannot keep its ERC moratorium in place indefinitely.
Commissioner Werfel tried to slow down the ERC swimmers by making the pool shallower, artificially ending the ERC program early through the moratorium and his requests to Congress to pass his preferred legislation to retroactively change the deadline to file timely claims to January 31, 2024. However, the bill failed to receive enough votes to end debate and the Senate left town faster than Noah Lyles in the 100 meter dash.
This post discusses the IRS’s recent issuance of ERC claim disallowance letters, the Stenson order, and provides guidance for those taxpayers that may be ERCed (irked) by the claim submission and review process.
IRS asked for time to prepare but instead stumbled out of the starting block
In IR-2024-198, the IRS identified five additional common signs of an incorrect ERC claim: (1) essential businesses during the pandemic that could fully operate and didn’t have a decline in gross receipts; (2) business unable to support how a government order fully or partially suspended business operations; (3) business reporting family members’ wages as qualified wages; (4) business using wages already used for paycheck protection program loan forgiveness; and (5) large employers claiming wages for employees who provided services. The first two of the new red flags appear to be the primary bases for the complete disallowance letters that IRS has recently issued.
While the twelve (12) total red flags provide helpful guidance for taxpayers that may not have submitted accurate ERC claims, the IRS’s perfunctory denial of tens of thousands of ERC claims calls into question the quality of the IRS’s review and decision-making process. In fact, many of the recent ERC claim disallowance letters did not inform recipients of their right to challenge the ERC claim denial with the IRS Independent Office of Appeals (Appeals). Other claim disallowance letters contain boilerplate language stating that the IRS determined the taxpayer is not an “Eligible Employer” without providing any details as to how the IRS made such determination. If the IRS wanted to scare taxpayers into not filing eligible ERC claims, sending letters saying that a taxpayer must sue in District Court for a refund without providing a clear reason for denying their ERC claim is certainly one way to do it. Another is maintaining the current moratorium on processing ERC claims submitted after September 14, 2023. The IRS’s arbitrary and incomplete ERC claim disallowance letters coupled with the ongoing claims-processing moratorium shows that even increased funding can’t solve poor leadership from IRS management. Instead, this demonstrates IRS’s antipathy for a Congressionally mandated program that they finally had to admit was not rife with fraudulent claims of up to 95%, but instead only amounted to 10-20% that might be erroneous.
IRS and/or Appeals denials are just the qualifying heats, District Court is the medal round
Taxpayers that have received ERC claim disallowance letters can: (1) protest the claim disallowance with Appeals, and, if that protest is denied, (2) file a refund lawsuit in U.S. District Court or the Court of Federal Claims. Given that Appeals has shirked its responsibilities to be “fair and impartial” in other “high-risk” cases, taxpayer protests of ERC claim denials may be unsuccessful. For those taxpayers that continue to believe they are eligible to claim the ERC, they should consider engaging tax counsel to assist with filing an Appeals protest or a refund lawsuit. Determining whether a taxpayer qualifies for the ERC is complex. Without a clear explanation from the IRS as to why it believes a taxpayer does not qualify for the ERC, taxpayers are forced to fend off any number of arbitrary and unidentified disqualifications, and yet must still go to Court for vindication.
The government entered the Rugby scrum in Arizona and received a beating
The U.S. District Court for the District of Arizona’s recent order in Stenson Tamaddon LLC v. I.R.S. (“Stenson”) calls the IRS’s ERC claims processing moratorium into question. The plaintiff claimed the IRS was running out the clock on ERC claims by instituting the moratorium and then attempting to keep it in place to prevent submission or payment of any claims after September 14, 2023. The current deadline for timely claims is April 15, 2025, and the judge essentially agreed with the plaintiff that “even if the moratorium is not truly indefinite, it still transforms into a quasi-cancelation of the ERC program if it is allowed to continue until April 15, 2025”. Instead, the judge confirmed that the IRS cannot “choose not to participate in a Congressionally mandated program” and the “IRS does not have the discretion to permanently ignore some ERC claims.” What this means is that so long as the claim is timely filed, the IRS must process them, even if the moratorium remains in place.
Continuing the beating, the court found that Stenson raised “serious questions” as to whether the IRS’s ERC claim processing moratorium is lawful given that it has been extended indefinitely. Further, the court noted that Stenson “raised some very serious separation of powers concerns regarding the [IRS’s] implementation of the [ERC claim processing] moratorium as it relates to the CARES Act[.]” The judge showed the government the yellow card and warned that continuation of the moratorium would ultimately result in a red card for any of several reasons.
Takeaway – The IRS can still be Team USA without indiscriminately denying ERC claims
The IRS’s job is to implement the law as written by Congress, and according to the Taxpayer Bill of Rights, taxpayers are entitled to expect the IRS will treat them fairly and consider their individual facts and circumstances. Many commentators have complained about the ERC simply because so many businesses were eligible, the government had more claims than they had anticipated. Nevertheless, the IRS’s job is not to hold ERC claims hostage while demanding a change in the law. Nor is it IRS’s job to deny ERC claims simply to protect the fisc. ERC claimants are entitled to the same consideration as every taxpayer—fair and impartial decision making and being timely informed of their tax liability and their rights.
Given that the ERC was enacted as part of the CARES Act in March 2020 and taxpayers still haven’t received “pandemic-era” relief, the IRS’s ERC claims processing unit won’t be winning any medals this summer. But the IRS can still do the right thing and process valid ERC claims in a timely and efficient manner such that eligible taxpayers receive long-since Congressionally approved ERCs. The IRS can course correct and end up on the medal podium by returning to the roots of their core mission “to provide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities and to enforce the law with integrity and fairness to all.” That way, we can all be Team USA.
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