Navigating the next phase: IRS moves on Employee Retention Credit claims

Introduction

The IRS recently announced the completion of a detailed review of over one million Employee Retention Credit (ERC) claims, prompting it to enter into the next stage of ERC claims processing. Per the news release, the review involved months of digitizing information and analyzing data since last September to assess a group of more than one million ERC claims representing more than $86 billion filed. Additionally, the IRS informed taxpayers on the status of the ERC moratorium and ERC claim withdrawal process, contemplates reopening the voluntary disclosure program and provides additional insight into its pursuit of curbing abuse.

Key takeaways

• The IRS categorized ERC claims into three categories of risk: high, medium and low, but did not indicate the basis on how risk was identified or determined.
• The highest risk claims will soon be denied, and the lowest risk pre-moratorium claims will soon begin processing. Payments are targeted to begin later this summer, with the oldest claims being processed first.
• 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” before it begins processing medium risk claims.
• The moratorium is still in place and the IRS has no intention of ending it until Congress can be consulted on new legislation, including the early-sunsetting of 2021 ERC claims and a potential extension of the statute of limitations.
• The IRS ERC withdrawal program is still open to help alleviate the backlog of 1.4 million unprocessed claims and the IRS is contemplating reopening the ERC Voluntary Disclosure Program, albeit with less favorable terms.
• The IRS also provided an update on the status of criminal investigations, audits and promoter investigations.

Tiers of risk and their implications

Based on the findings of its review, the IRS categorized claims into three risk categories: high, medium and low risk, and provided limited insight to the how they’ll approach the tiers:

Highest risk

• 10% to 20% show clear signs of being erroneous claims, including filings with warning signals that, according to the IRS, “clearly fall outside the guidelines established by Congress.”
• Tens of thousands of these claims will be denied in the coming weeks, comprised of billions of dollars that IRS Commissioner Danny Werfel calls “clearly improper.”

Medium risk

• 60% to 70% show an unacceptable level of risk.
• For this category of claims, 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.”
• The IRS news alert does not mention pending action on the processing of these claims, or which factors the IRS used to determine what is considered medium risk.
• Based on the IRS’s position on promoters and the author’s experience, medium risk claims likely relate to employers in regions and industries where ERC eligibility is unlikely and where use of promoters and aggressive positions is probable.

Lowest risk

• 10% to 20% show no eligibility warning signs and were received prior to last fall’s moratorium.
• The IRS will begin “judiciously processing” more of these claims and anticipates some of the first payments in this group will go out later this summer, though the IRS emphasized it will be “a dramatically slower pace than payments that went out during the pandemic period given the need for increased scrutiny.”
• This additional scrutiny largely relates to calculation errors made during the complex filings. For those claims with calculation errors, the amount claimed will be adjusted before payment.
• The IRS also noted that generally the oldest claims will be processed first, and no claims submitted during the moratorium period will be processed at this time.

The moratorium is still in effect with no end in sight

Following the Sept. 14, 2023, moratorium (see our previous article), the IRS received new ERC claims at a rate exceeding 17,000 per week and has a current ERC inventory of more than 1.4 million claims. 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.

“We decided to keep the post-September moratorium in place because we continue to be concerned about the substantial number of claims coming in so long after the pandemic,” Werfel said. “These claims are clogging the system for legitimate taxpayers. We worry that ending the moratorium might trigger a gold rush by aggressive marketers that could lead to a new round of improper claims, which would be a bad result for taxpayers or tax administration. We will use this time to consult with Congress and seek additional help from them on the ERC program, including potentially closing down new claims entirely and seeking an extension of the statute of limitations to allow the agency more time to pursue improper claims.”

As a reminder, the bipartisan tax bill, which was passed by the House in January and currently remains stalled in the Senate, included changes to the ERC. Among the provisions contained in the bill include ending the ERC prematurely, as of Jan. 31, 2024, increasing the penalties for taxpayers who abused the program, and extending the statute of limitations for assessment to six years from five. However, it’s very unlikely this bill will pass the Senate.

IRS ERC withdrawal program remains open and voluntary disclosure program possibly reopened

As the IRS’s backlog of claims exceeds 1.4 million, they have chosen to keep the program open and continue to urge employers to consider utilizing the special withdrawal program. No sunset date has been given. See our Tax Alert for more information on this program.

Additionally, in the coming weeks, the IRS will make a decision on whether to reopen the special ERC Voluntary Disclosure Program (see our related article for discussion). If the program reopens, the IRS anticipates the terms will not be as favorable as the initial offering that closed in the spring.

Status update on IRS activities in pursuing ineligible claims

The news release states the following excerpt as a reminder to those with pending claims or considering submitting an ERC claim:

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.

Please reach out to your Baker Tilly advisor with questions on how the above may impact your tax situation.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.