WASHINGTON, D.C. — The Internal Revenue Service (IRS) has announced new initiatives to aid small businesses and curb improper payments within the Employee Retention Credit (ERC) program. This comes amidst increasing concerns about the high volume of fraudulent claims spurred by misleading marketing practices.
The IRS continues to scrutinize disallowed ERC claims, intensify audits, and pursue civil and criminal investigations to combat potential fraud and abuse. Findings from a recent IRS review highlighted a significant rate of improper claims in the current ERC inventory. This has resulted in the issuance of 28,000 disallowance letters to businesses with high-risk claims, potentially preventing up to $5 billion in improper payments. Concurrently, thousands of audits are ongoing, and 460 criminal cases have been initiated.
Amid these efforts, the IRS has identified 50,000 valid ERC claims. These claims are now being prioritized for payment processing in the coming weeks. This action aims to balance support for legitimate businesses against the influx of improper claims driven by aggressive marketing.
IRS Commissioner Danny Werfel underscored the complexity of the ERC program, stating, “The Employee Retention Credit is one of the most complex tax provisions ever administered by the IRS, and the agency continues working hard to balance our work to protect taxpayers from improper claims while also making payments to qualifying businesses. It has been a time-consuming process to separate valid claims from invalid ones. During the past year, we maintained a steady cadence of both ERC approvals and disapprovals.”
The ERC was initially implemented to support businesses during the pandemic. However, the program has increasingly become the target of misleading marketing, with some promoters rebranding the credit under various names such as grants or business stimulus payments. This has led to a surge in claims, prompting the IRS to impose a moratorium on processing new claims submitted after September 14, 2023. This pause allowed the agency to digitize information and thoroughly review the claims, improving the accuracy of future processing.
The comprehensive review conducted during the moratorium has positioned the IRS to move forward with more payments and disallowances. The agency plans to maintain close communication with the tax professional community to navigate the complexities of the ERC landscape.
Commissioner Werfel highlighted the challenges posed by misleading marketing, stating, “Unfortunately, the situation was compounded by misleading marketing flooding businesses to claim these credits, creating a perfect storm that added risk of improper payments for taxpayers and the government while complicating processing for the IRS and slowing claims to legitimate businesses.”
Continued Monitoring and Appeals Process
The IRS is closely monitoring the feedback from tax professionals regarding potential errors in disallowance notices. Early indications suggest that errors are isolated, with more than 90% of disallowance notices being valid. The IRS will adjust its processes and filters for determining invalid claims following each wave of disallowances to minimize the burden on businesses and their representatives.
Businesses that receive a denial of an ERC claim have options to file an administrative appeal. The IRS has acknowledged that some recent disallowance notices inadvertently omitted information about the appeals process. The agency is taking steps to ensure this information is provided to all relevant taxpayers. Details on filing an appeal or challenging an IRS determination are available on IRS.gov.
Upcoming Payments and Processing Adjustments
The IRS plans to expedite payments for 50,000 low-risk ERC claims. These claims are currently being processed, with payments expected to begin in September and continue in the following weeks. Additionally, the IRS will start processing claims submitted between September 14, 2023, and January 31, 2024, focusing on high and low-risk claims.
Businesses may receive payments for some valid tax periods while the IRS continues to review other periods for eligibility. ERC eligibility can vary by tax period based on factors such as government orders or changes in gross receipts.
The IRS’s continued efforts aim to ensure the integrity of the ERC program, support legitimate businesses, and prevent improper payments.
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