IRS enters 'next stage' of ERC tax-credit work, outlines plans to resume payments

The Internal Revenue Service plans to deny tens of thousands of improper Employee Retention Credit applications even as it promises to renew processing legitimate claims.

The agency in an announcement this week said it had taken the time since its Sept. 14 moratorium on processing new ERC applications to analyze the more than 1 million ERC claims filed in 2023 — and found that between 60% and 70% showed an unacceptable level of risk.

But there is good news for small-business owners who filed legitimate claims caught in limbo over the last few years. The IRS will start processing claims it considers “low risk.” The agency estimates between 10% and 20% of ERC claims fall into that category. 

The first payments in that group should go out “later this summer,” according to the agency's announcement, but the IRS warned that those payments will be issued at "a dramatically slower pace" than what existed before the moratorium given the need for increased scrutiny. 

The agency also stressed that business owners who have filed their claims do not need to take any action and should await notification from the IRS. The agency said owners should not call the IRS toll-free lines as there will not be any additional information while the processing continues. 

IRS Commissioner Danny Werfel again this week placed the blame for the ERC challenges on third-party “promoters” who encouraged business owners to file claims for which they were not eligible while pocketing a percentage in fees. 

“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. The reality is many aren’t,” Werfel said in the agency's statement, which the IRS labeled as the "next stage of Employee Retention Credit work."

“People may think they are on safe ground," Werfel said, "but many are simply not eligible under the law.”

Werfel also cautioned taxpayers to be wary of promoters using this most-recent IRS announcement as a springboard to attract more clients to file ERC claims.

“The whole world has changed involving Employee Retention Credits since the deepest days of the pandemic,” Werfel said. “Anyone applying for this credit needs to talk to a trusted tax professional and closely review the eligibility requirements, not someone playing fast and loose and trying to make a fast buck off well-meaning taxpayers."

This week's IRS announcement comes after the IRS was forced to file an affidavit in court detailing its ERC work — a larger response to lawsuit filed by consulting firm StenTam Tammadon LLC challenging the agency’s moratorium on processing new ERC claims. The IRS has said StenTam Tammadon has no standing in the case, has not provided a compelling reason to overrule federal agency discretion, and that the moratorium is not a final agency action or a rule for which a court can issue a remedy. 

The fact that payments may resume in the summer, however, shows that the agency is feeling pressure to process new claims and begin sending out payments to legitimate businesses. 

IRS, Congress look to end ERC program early

The agency this week said it would work with Congress to clamp down on fraud and possibly end the program early given its fear that ending the moratorium could result in another flood of fraudulent claims. The IRS has taken this position before, but Congress has not acted on it — although Congress likely would be on board with ending the ERC early given that it had proposed doing so earlier this year to help pay for a raft of other proposed tax cuts.

The IRS court filing contains a wealth of data and an inside look at the ERC program over the past few years. That includes an eye-popping backlog of 1.4 million claims that experts have said could take years to properly sort through, especially given the IRS's emphasis on the pace of processing claims.

In October 2022, ERC claims averaged 25,000 to 30,000 per week. By last summer, that had doubled to 50,000 to 60,000 per week. That created a backlog the IRS has struggled to get through since, growing from just 60,000 claims at the end of 2022 to 1.1 million total at the end of 2023.

The IRS also at the end of 2023 launched the ERC Voluntary Disclosure Program, which allowed business owners who mistakenly took the credit to repay 80% of the credit value they received in exchange for putting the credit behind them. That program, which ended March 22, yielded more than $1 billion from the 2,600 businesses that participated.

A separate ERC voluntary withdrawal process for businesses that had applied but had not yet received money yielded about $574 million in withdrawn claims.

The agency has already processed about 3.6 million ERC claims worth an estimated $230 billion to businesses, according to court documents. That makes it one of the largest Covid-era small-business programs to be rolled out, alongside the Paycheck Protection Program and the Small Business Administration's Economic Injury Disaster Loan program.

Business owners still have time to apply for at least part of the credit. While all claims regarding the 2020 year had a deadline of April 15, claims filed for 2021 have a deadline of April 15, 2025. That also, however, means there will continue to be applications piling up at the IRS as it struggles with its backlog.