50,000 low-risk claims could be paid as soon as September
The Internal Revenue Service (IRS) touted its rejection of thousands of ERC claims in the agency’s latest update on Employee Retention Credit (ERC) claims today. The announcement contains updated information on claims disallowances but also some good news for businesses with “low risk” claims.
The IRS continues to step up criminal and civil enforcement surrounding ERC claims. Today’s announcement noted that 28,000 disallowance letters were sent to businesses whose claims showed a “high-risk of being incorrect.” According to the IRS, the latest wave of rejections represents an estimated $5 billion in savings to the government. The IRS also noted that thousands of audits are underway and that, as of July 1, it had initiated 460 criminal investigations, with 37 of those investigations resulting in criminal charges so far.
The IRS acknowledged that some of its recent disallowance letters were erroneously issued, nevertheless claiming that 90% of the disallowances were made correctly. This news was coupled with the IRS’ admission that many of the disallowance letters “inadvertently omitted a paragraph highlighting the process for filing an appeal…” The IRS vowed to correct any errors in claims disallowances and to take steps to ensure that correct information regarding the appeals process is sent to all those who should have received it.
Today’s announcement also contained some good news for ERC claimants. The IRS stated that upwards of 50,000 low-risk ERC claims would move forward for payment beginning in September, with more to come later in the Fall. While this is still not as fast as some practitioners or taxpayers would like, IRS Commissioner Danny Werfel asked for patience, saying “[t]his has been a resource-intensive credit for IRS teams to evaluate.” The IRS also indicated that it would begin processing claims filed between Sept. 14, 2023 and Jan. 31, 2024. Until now, claims submitted after September 14, 2023 were still subject to the IRS’s moratorium on processing claims.
The IRS claims that it is listening to the tax community and is making changes based on feedback from its earlier actions on ERC claims. Whether this results in improvements in claims processing remains to be seen.
ERC Background
The ERC, created under the CARES Act to assist businesses that continued to pay their employees during the COVID-19 pandemic, is a refundable tax credit that allows employers to offset their employment taxes against a percentage of qualified wages paid to employees. Eligible taxpayers can claim the ERC on an original or amended employment tax return for an eligible period between March 13, 2020, and December 31, 2021. To qualify for the ERC, a business must meet one of the following three criteria:
- Experienced a full or partial suspension of operationsresulting from a government order issued due to the COVID-19 pandemic during 2020 or the first three quarters of 2021;
- Experienced a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021as defined by the criteria set forth in the appropriate IRS guidance (Notice 2021-20 for 2020 and Notice 2021-23 for 2021);
- Qualified as a recovery startup businessfor the third or fourth quarters of 2021 as defined in Notice 2021-49.
Since October 2022, the IRS has been warning taxpayers to be wary of dubious ERC schemes. Last March, the IRS issued IR-2023-49, placing abusive ERC schemes at the top of its 2023 list of “Dirty Dozen” transactions. In September 2023, the IRS imposed a moratorium on processing ERC claims.
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