On June 20, 2024 the Internal Revenue Service (IRS) announced a new release regarding Employee Retention Credit (ERC) claims.
The IRS is entering the next phase of processing ERC claims with the continued worry regarding the large number of fraudulent claims. Therefore, the IRS declared new processing and compliance steps. Taxpayers were informed about the status of the ERC claim withdrawal process, ERC moratorium, provided further awareness into great efforts of reducing abuse and the possibility of having the voluntary disclosure program reopened.
Key Take Aways From the IRS Announcement:
- The IRS defines the risk levels for ERC claims into three categories: high, medium and low (see more on this below).
- The claims identified as low-risk and filed prior to the September 14, 2023 moratorium will start processing soon and the claims identified as high risk will be rejected. Later this summer, payments are expected to be made while ramping up reviews for low-risk claims.
- The moratorium is still in effect and there is no intent of terminating it until new legislation has been passed on to Congress.
- An update was provided on the status of criminal audits and investigations per the IRS. In summary, 450 criminal cases were admitted and so far, 36 have resulted in federal charges.
- The IRS is considering reopening the ERC Voluntary Disclosure Program, although with less beneficial terms.
- The ERC withdrawal program is also still open and there is an urge for employers to consider utilizing the program to help lighten the large amounts of unprocessed claims. No close out date has been provided.
- Companies waiting for refunds likely have a long wait ahead, especially for those filed after the moratorium was placed into effect.
- It is advised that taxpayers with active ERC claims be patient and do not need to do anything additional at this time as in most cases there is no new information available.
Risk Categories
The IRS categorized claims into three risk categories: high, medium and low risk, based on the findings of its review. There was very little information provided as to how they’ll consider the tiers:
High Risk
- 10% to 20% of more than 1 million claims indicate warning signs that these claims clearly do not meet the guidelines established by Congress and will be denied in the coming weeks.
Moderate Risk
- 60% to 70% of claims fall into this category. The IRS will conduct additional analysis to collect more data with the purpose of increasing efficiencies in resolving valid claims while still preventing improper payouts and advancing the overall compliance review.
- There were no risk indicators elaborated in which the IRS used to conclude what is defined to be medium risk.
Low Risk
- 10% to 20% of claims show no warning signs. The IRS is prioritizing these oldest claims first. Any claims submitted during the moratorium period will not be analyzed at this time. They anticipate some of the first payouts in this tier to be made later this summer.
The IRS confirms its promise to identify erroneous claims and to reduce the ERC backlog. The IRS encourages taxpayers with inquiries about ERC to consult experienced tax professionals due to the ongoing aggressive promotion efforts made by unknowledgeable ERC service providers.
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