IRS processing more ERC claims, moves moratorium to Jan. 31, 2024

The Internal Revenue Service is paying out more claims for the Employee Retention Credit program, even as it gives the claims greater scrutiny, and is moving the moratorium on processing new claims from Sept. 14, 2023 to Jan. 31, 2024.

The IRS is continuing to issue denials of improper ERC claims, while intensifying its audits and pursuing civil and criminal investigations of potential fraud and abuse. The findings of an IRS review, announced in June, confirmed concerns raised by tax professionals and others that the rate of improper ERC claims in the current inventory was extremely high.

In recent weeks, the IRS has sent out 28,000 disallowance letters to businesses whose claims showed a high risk of being incorrect. The agency estimates these disallowances will prevent up to $5 billion in improper payments. Thousands of audits are underway, and 460 criminal cases have been initiated. The IRS has also identified 50,000 valid ERC claims and is quickly moving them into the pipeline for payment processing in the weeks ahead. These payments are part of a so-called low-risk group of claims.

Given the complexity of the ERC and to reduce the risk of improper payments, the IRS emphasized it is moving methodically and deliberately on both the disallowances and additional payments to balance the needs of businesses with legitimate claims against the promoter-fueled wave of improper claims that came into the agency. 

"The Employee Retention Credit is one of the most complex tax provisions ever administered by the IRS," said IRS Commissioner Danny Werfel during a press call Thursday. "It's technically detailed and resource-intensive, and our challenges grew exponentially with the flood of promoter claims that came pouring in well after the pandemic ended. Our teams have been working hard to navigate this complex landscape. We've been focused on balancing our efforts to protect taxpayers from improper claims while also working to speed more payments to qualifying businesses. It has been a time-consuming process to separate valid claims from invalid ones. By no means has this been a simple situation."

He noted these are not simple 1040 forms that can be quickly reviewed and paid out by the IRS.

"These claims span multiple tax law changes, multiple calendar year quarters and have differing payment amounts," said Werfel. "These have to be worked individually, claim by claim, and they all come in on paper, adding even further to the complexity of sorting valid claims from invalid ones. During the past year, we maintained a slow, judicious cadence of both ERC approvals and disapprovals, but we are now taking important steps forward to intensify our pace and begin reducing the overall inventory of pending ERC claims. Today, we are moving forward with our long-held plans to continue to deny claims when they appear improper, and also moving to pay out more legitimate claims. We're doing this by moving a substantial group of claims into both categories."

He pointed out that the ERC was created by Congress to help businesses weather the pandemic. "But then aggressive promoters moved in," said Werfel. "Last year, promoters intensified their marketing, bombarding the airwaves with ads and aggressive marketing. You couldn't turn on the TV or radio without coming across an ERC ad. These promoters urged people to file what they called risk-free claims with the IRS for the ERC. At the same time, they charged a hefty percentage on the potential payouts. The program turned into a gold rush for promoters. These promoters and the taxpayers they pulled in swamped the IRS with incoming applications, clogging our processing centers and harming small businesses filing legitimate claims. Tax professionals sounded the alarm bells to me and others on this, sharing that the marketers were pulling in taxpayers that clearly didn't qualify under the intricate program rules."

To counter this torrent of activity, last fall he announced the IRS was putting in place a moratorium on processing new ERC claims filed after Sept. 14, 2023.

"The moratorium has been without a doubt a success," said Werfel. "It slowed the number of claims coming in, and the marketing on TV and radio dropped dramatically. It gave us time to focus on our compliance work, and importantly, it gave us time to analyze the massive inventory of ERC claims that came in. The moratorium has now been in place for almost a year."

During this period, the IRS learned valuable information that will help guide the program down the tracks in the months ahead. 

Faster pace

"Going forward, we will proceed at a faster pace on both approvals and denials than before. But it will remain a measured and responsible pace that won't go off the rails, protecting both taxpayers and revenue," said Werfel. "As we move ahead, we're going to continue protecting taxpayers from improper claims. In the last few weeks, we've had about 28,000 letters go out, disallowing claims up to potentially $5 billion."

However, the IRS has also heard concerns from some tax professionals that it may be disallowing legitimate ERC claims. 

"With these recent disallowance letters going out, the IRS is aware of concerns raised by tax professionals about potential errors," said Werfel. "While the IRS is still evaluating the results of this first significant wave of disallowances in 2024, our early indications show these errors appear to be isolated. The concerns flagged, which we are currently looking into, impact less than 10% of the disallowance letters sent. We are closely watching this, and it's important to keep in mind, there was a wide range of businesses and claims that came in due to the heavy marketing. It's a big sea of claims from a diverse set of taxpayers. Even then, it's not surprising, given the complexity of this credit, that there are some questions. That's why we're not rushing to push out large volumes of these denials immediately. This is uncharted territory for the IRS, and we are navigating the landscape carefully."

He pledged to continue to work with tax professionals. "As part of this, the IRS will stay in contact with the tax community," said Werfel. "We will monitor the situation involving disallowances and make any adjustments to minimize burden on businesses and their representatives. Where we need to, the IRS will adjust its processes and filters for determining an invalid claim following each wave of disallowances."

He noted that in cases where claims can be proven to have been improperly denied, the agency will work with taxpayers to get it right. The IRS is also reminding businesses that when they receive a denial of an ERC claim, they have options available to file an administrative appeal with the IRS independent Office of Appeals.  

"At the same time, we are announcing today that we're sending 50,000 more claims out into processing for payment in the next few weeks," said Werfel. "These claims will total up to $5 billion. This means more low-risk ERC claims will be paid out quickly. There are a couple of steps for the payments to go through. We have moved these claims into the processing pipeline, and after that, they will go into the payment process. The IRS projects the first of this group of payments will begin in September, with additional payments going out in subsequent weeks. As the IRS begins to process additional claims, the agency reminds businesses that they may receive payments for some valid tax periods, generally quarters, while the IRS continues to review other periods for eligibility."

Moratorium update

Werfel also provided an update on the processing moratorium on new ERC claims. Previously, the agency was not processing claims filed after Sept. 14, 2023. As the agency moves forward, it will now start judiciously processing claims filed between Sept. 14, 2023, and Jan. 31, 2024, the same date for the cutoff of ERC claims in the Tax Relief for American Families and Workers Act, which failed to pass in the Senate last week. As with the rest of the ERC inventory, work will focus on the highest- and lowest-risk claims. This means there will be instances where the agency will start taking actions on claims submitted in this time period when the agency has seen a sound basis to pay or to deny a refund claim.

"Of course, we will also be working older claims during this period as well," Werfel added. "For any of these claims, whether the older ones or the ones covered by the new moratorium date, here's what we will do: When we identify a claim as low risk, we will be taking steps to pay it, and when we see a high-risk claim, we will deny it. We will have more to say on ERC in the coming weeks. The IRS also continues to urge employers with pending ERC claims or ones with questions about previously approved claims to review eligibility requirements to make sure they meet the specific criteria."

The IRS recently added five new warning sign indicators about potentially improper claims, to add to seven other common red flags the agency previously highlighted. 

"Businesses with claims that show these red flags should review eligibility requirements and talk to a trusted tax professional about their claim," said Werfel. "For businesses with concerns about pending claims, the IRS encourages them to consider the ERC claim withdrawal program. This allows them to remove a pending ERC claim, one the IRS has not processed yet they would. They can withdraw the claim and pay no interest or penalty."

Already the claim withdrawal process for those with unprocessed ERC claims has led to more than 7,300 entities withdrawing $677 million worth of claims, he noted.

"Unfortunately, this route forward was made much more complicated by the flood of marketers and promoters pushing businesses to claim these credits," said Werfel. "This created 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. Today, the tide is starting to turn on the Employee Retention Credit program. For the good of businesses with legitimate claims, and for the good of administering our nation's tax laws, it's critical we move forward to resolve this pandemic era program. This effort will continue and intensify in the months ahead."