The Internal Revenue Service (IRS) announced a breakthrough today in the logjam of Employee Retention Credits (ERC) that has plagued the agency since a moratorium on processing claims began last September. The breakthrough, while significant, may not be what many taxpayers and practitioners were looking for, but it is a step in the direction of relief for some taxpayers relying on this complicated credit.
The ERC is a refundable tax credit for certain eligible businesses and tax-exempt organizations that had employees and were affected during the COVID-19 pandemic. As with any government program that is designed to get large sums of money out to the public quickly, there’s a high risk of fraud. As a result, the IRS stopped processing ERC claims to perform a detailed review,
According to the IRS announcement yesterday, ‘Low-risk’ claims will again be processed by the IRS, but the number of claims considered to be low risk may leave some taxpayers wanting. As part of what the IRS called a “quarterly update” on the ERC program, the service discussed the thousands of unprocessed claims in three different categories—high risk, unacceptable risk, and low risk. Each category will be handled differently by the IRS, and the category of the claim will determine if it will be processed, rejected, or go under further review.
The IRS believes that the high-risk group of ERC claims involves about 10%-20% of those that were submitted. According to the service, this group shows “clear signs of being erroneous.” To be sure, the IRS says they “plan to deny thousands of high-risk ERC claims.” In this regard, the IRS is implementing an application of congressional intent in the ERC statute while asking Congress for help further clarifying certain issues. In denying the claims in the high-risk group, the IRS says these claims show signals that “clearly fall outside the guidelines established by Congress.” Because these claims are so egregious, the service is very comfortable moving ahead with these denials.
The next group of claims are the largest group of the three and they include an estimated 60-70% of the bunch. The IRS says that this group shows an “unacceptable level of risk,” although it does not go into much more detail than that. The service describes a process where certain risk factors are identified and if a claim has too many of them, it is lumped into this category to be further adjudicated down the road. The challenge with this category of claims is that it is unclear how many of the claims are purposefully fraudulent and how many display risk factors because of the complexity of the claim process. This is precisely why the IRS says it will take more time to process these claims.
Finally, the smallest group of the bunch includes those claims that the service has deemed “low risk.” In the press release from the IRS, they claimed that this group exists because the IRS is “concerned about small businesses waiting on legitimate claims.” While this claim of compassion from the IRS is heartwarming, the reality is that this group of ERC claims display no warning signs or risks and most likely should have been processed some time ago. The good news for taxpayers in this category is that nothing needs to be done on their end and payments should start being processed this summer.
“The fact that the IRS is processing low-risk claims is good news for taxpayers who followed the rules and submitted claims as they were told to do under the law,” said Kathy Enstrom, Director of Investigations at Moore Tax Law Group. “But the fact that it took this long and only after the threat of lawsuits is not something the service should be proud of. Hopefully those honest taxpayers who have been caught up in the middle group of claims can receive the money they are owed soon as well.”
The complexity of the ERC is something that many practitioners say is the root of a majority of risky claims. IRS Commissioner Danny Werfel agrees. “This is one of the most complex credits the IRS has administered, and we continue to ask taxpayers for patience as we unravel this complex process,” Werfel said in the press release. “Ultimately, this period will help us protect taxpayers against improper payouts that flooded the system and get checks to those truly eligible.”
The IRS says that this quarterly review is on the heels of months of “digitizing information and analyzing data” to assess the ERC claims—claims that topped a whopping $86 billion in the last year. Aggressive marketing campaigns on traditional media platforms, but also on social media platforms like TikTok, may be to blame. With the service slow to respond on the same platforms where this guerilla marketing took place, ERCs appeared like good practice as opposed to a scam.
What Should Taxpayers Do?
The IRS says that taxpayers who filed legitimate claims should do nothing at this time. Their claims will be processed eventually and taxpayers will receive the money they are due. The service also emphasized that taxpayers should not call the IRS toll-free line to inquire about the status of their claim. Telephone operators will not be able to provide updates or tell taxpayers where their claim is in the process.
At the same time, the IRS also warned those taxpayers who have knowingly misled the service. Commissioner Werfel said he urges “those with pending claims to use this period to review the guideline checklist on IRS.gov, talk to a legitimate tax professional rather than a promoter and use the special IRS withdrawal program when there’s an issue.”
The IRS ERC Withdrawal Program remains open for those taxpayers wishing to correct a mistake and “avoid future compliance issues.” With the number of warnings from the IRS about using the withdrawal program, the IRS is making it clear that they will find a distinction between those who made mistakes on their claims and those who have purposefully tried to deceive the IRS.
Despite the delays in processing claims, the IRS has been busy. For their part, the service has processed 28,000 claims worth $2.2 billion and disallowed more than 14,000 claims worth more than $1 billion. As of May 31, 2024, the IRS Criminal Investigation division has initiated 450 criminal cases, with potentially fraudulent claims worth nearly $7 billion.
Read the full article here