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Kostelanetz Alert: IRS Resumes Processing ERC Claims; Says Most Claims Present “Unacceptable Level of Risk”

Low Risk Claims to Be Paid Beginning This Month

The Internal Revenue Service (IRS) announced today that it would resume processing “low risk” Employee Retention Credit (ERC) claims, ending a moratorium on processing ERC claims that has been in place since last September.  The announcement came as part of a “quarterly update” on the IRS’s progress in processing hundreds of thousands of outstanding ERC claims.  While the announcement is good news for some taxpayers, the IRS also stated that they plan to deny a majority of claims that have been submitted so far on the grounds that they present an “unacceptable level of risk.”

It is not clear to what extent today’s announcement was spurred by the filing last month of Stenson Tamaddon, LLC v. IRS, No. 2:24-cv-01123 (D. Ariz.), which sought to compel the IRS to end the moratorium on processing claims.  Notably, the IRS says that “generally the oldest claims will be worked first, and no claims submitted during the moratorium period will be processed at this time.”

The announcement provides the most extensive window to date into how the IRS has been approaching ERC claims during the nine-month moratorium period, describing a months-long review in which the IRS digitized records and analyzed more than 1 million ERC claims that were filed last year, representing more than $86 billion.  The IRS has grouped those analyzed claims into three categories. The “highest risk group,” consisting of 10–20% of those claims, show “clear signs of being erroneous.” The IRS plans to deny those claims in the coming weeks.

Another 60–70% of the analyzed claims show “an unacceptable level of risk.” These claims will undergo “additional analysis” while the IRS tries to “gather more information to improve the agency’s compliance review, speeding the resolution of valid claims while protecting against improper payments.”  The IRS expects it will reject a majority of these claims as being improper.

The IRS did provide some hope to businesses waiting on their ERC claims. The third category of claims, consisting of a minority of the claims filed, are what the IRS deems “low risk.”  The agency says they will start processing these claims immediately, with payments to this group beginning this summer.

The IRS blames aggressive marketing on the unprecedented number of claims and is still playing catch up after claims flooded the agency last year. IRS Commissioner Danny Werfel said that the ERC “is one of the most complex credits the IRS has administered.”  He emphasized the amount of time that is needed to properly address each claim: “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.”

Commissioner Werfel encouraged anyone who submitted a claim to consult with a tax professional to determine if additional steps need to be taken on their claim.  Those with pending claims that are ineligible can withdraw their claims to avoid potential interest or penalties.  Those who received an ERC check but have not cashed or deposited it can also withdraw the claims.

The IRS noted that its compliance programs, including the ERC Voluntary Disclosure Program that ended in March 2024 and the ERC Withdrawal Program, have to date led to the recovery or avoidance of more than $2 billion in payments.

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:

  1. Experienced a full or partial suspension of operations resulting from a government order issued due to the COVID-19 pandemic during 2020 or the first three quarters of 2021;
  2. Experienced a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021 as defined by the criteria set forth in the appropriate IRS guidance (Notice 2021-20 for 2020 and Notice 2021-23 for 2021);
  3. Qualified as a recovery startup business for 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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