IRS to Deny Thousands of Improper Employee Retention Credit Claims

Internal Revenue Service

WASHINGTON, D.C. — The Internal Revenue Service (IRS) has announced plans to deny tens of thousands of improper Employee Retention Credit (ERC) claims following an extensive review aimed at safeguarding taxpayers and small businesses. The agency will also start processing lower-risk claims to ensure that eligible taxpayers receive their due benefits.

Background and Findings

The IRS’s detailed review revealed significant issues with ERC claims. This pandemic-era credit was designed to help businesses retain employees during economic disruptions. However, aggressive marketing and complex guidelines have led to widespread improper claims.

IRS Commissioner Danny Werfel explained the gravity of the situation. “The completion of this review provided the IRS with new insight into risky Employee Retention Credit activity and confirmed widespread concerns about a large number of improper claims,” he said. By identifying these improper claims, the IRS aims to prevent billions of dollars in erroneous payouts while focusing on legitimate claims.

High-Risk Claims

The review involved digitizing and analyzing over 1 million ERC claims totaling more than $86 billion. The IRS found that 10% to 20% of these claims were in the highest-risk category, showing clear signs of being erroneous. These high-risk filings are characterized by warning signals indicating non-compliance with congressional guidelines. In the coming weeks, the IRS will deny these tens of thousands of claims.

Medium and Low-Risk Claims

Another 60% to 70% of claims displayed an unacceptable level of risk. These will undergo further analysis to improve compliance reviews and expedite the resolution of valid claims while preventing improper payments.

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On the other end, 10% to 20% of ERC claims were deemed low-risk, showing no eligibility concerns. The IRS will carefully begin processing these lower-risk claims, prioritizing those submitted before last fall’s moratorium. Payments for these claims are expected to start later this summer but will be issued at a slower pace compared to the pandemic period due to the need for increased scrutiny.

Implications for Small Businesses

The IRS understands the critical nature of timely payments for small businesses awaiting legitimate claims. Werfel acknowledged the complexity of administering the ERC and asked for continued patience from taxpayers. “Ultimately, this period will help us protect taxpayers against improper payouts that flooded the system and get checks to those truly eligible,” he added.

Next Steps

As part of the next phase, the IRS will prioritize older claims and those with calculation errors. Claims with errors will have the amounts adjusted before payment. No claims submitted during the moratorium period will be processed at this time.

The IRS’s actions highlight the challenges of balancing swift assistance with rigorous oversight. The agency aims to prevent fraud while ensuring that eligible businesses receive the support they need. This measured approach is crucial for maintaining the integrity of the ERC program and protecting public funds.

The IRS’s crackdown on improper ERC claims marks a decisive step in ensuring the integrity of pandemic relief efforts. By denying high-risk claims and cautiously processing low-risk ones, the agency seeks to strike a balance between preventing fraud and aiding legitimate businesses. This effort underscores the importance of careful oversight in the administration of complex tax credits, ultimately safeguarding both taxpayers and the economy.

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