The Employee Retention Credit (ERC) was introduced as a part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in 2020 to help businesses keep employees on their payroll during the COVID-19 pandemic. The credit was designed to provide financial relief to businesses that experienced significant declines in revenue or were forced to suspend operations due to government orders. However, the complexity of the ERC and aggressive marketing by some promoters have led to a significant number of erroneous claims being filed.
The IRS has been diligently working to identify and address these improper claims. A recent review has revealed that a substantial portion of the claims submitted show a high risk of being improper. As a result, the IRS has announced new measures to ensure compliance and protect taxpayers.
IRS’s Current Position on ERC Claims – In a recent announcement (IR-2024-169), the IRS outlined its plans to deny tens of thousands of high-risk ERC claims while resuming the processing of low-risk claims. This decision comes after months of digitizing information and analyzing data to assess the validity of over 1 million ERC claims, representing more than $86 billion.
- High-Risk Claims – The IRS has identified that between 10% and 20% of the ERC claims fall into the highest risk category. These claims exhibit clear signs of being erroneous, or even fraudulent in some cases, and fall outside the eligibility guidelines established by Congress. The IRS will be denying these high-risk claims in the coming weeks. This group includes filings with warning signals such as:
o Claims that significantly deviate from the established eligibility criteria.
o Claims submitted by businesses that do not meet the revenue decline or suspension of operations requirements.
o Claims that appear to be inflated or fraudulent. - Medium-Risk Claims – In addition to the high-risk claims, the IRS estimates that between 60% and 70% of the claims show an unacceptable level of risk. These claims will undergo additional analysis to gather more information and improve the agency’s compliance review. The goal is to speed up the resolution of valid claims while protecting against improper payments. Taxpayers with claims in this category may experience delays as the IRS conducts further investigations.
- Low-Risk Claims – Approximately 10% to 20% of the ERC claims are considered low-risk, showing no eligibility warning signs. The IRS will prioritize the processing of these claims to ensure that eligible taxpayers receive their refunds promptly. Businesses with low-risk claims can expect to see their refunds processed in the coming months, provided there are no additional issues identified during the review.
Generally, the IRS will work on the oldest claims first, but no claims received after September 14, 2023, when the IRS’s moratorium on processing claims began, will be processed at this time. The IRS has emphasized that businesses with pending ERC claims should not call the service’s toll-free numbers as information on the status of the processing of claims isn’t available to the phone assisters.
Availability of a Voluntary Withdrawal Program – The IRS has also introduced a special ERC Withdrawal Program to help businesses that may have submitted improper claims. This program allows taxpayers to withdraw their ERC claims voluntarily, avoiding future compliance issues and potential penalties. The withdrawal process is particularly beneficial for those who were pressured or misled by ERC marketers or promoters into filing ineligible claims. Who should consider withdrawal:
- Businesses with Unprocessed Claims – If your ERC claim has not yet been processed by the IRS, you can use the withdrawal program to request that the IRS not process your claim. This will prevent any future compliance issues and potential penalties.
- Businesses with Uncashed Refund Checks – If you have received an ERC refund check but have not yet cashed or deposited it, you can still withdraw your claim. The IRS will treat the claim as though it was never filed, and no interest or penalties will apply.
- Businesses with Concerns About Claim Validity – If you are concerned about the validity of your ERC claim and believe it may not meet the eligibility criteria, it is advisable to consider the withdrawal program. This will help you avoid potential audits and compliance actions by the IRS.
How to Withdraw an ERC Claim – To take advantage of the claim withdrawal procedure, follow the special instructions provided by the IRS at IRS.gov/withdrawmyERC. Here is a summary of the steps:
- Consult with Your Payroll Company: If your professional payroll company filed your ERC claim, consult with them. Depending on how the claim was filed, the payroll company may need to submit the withdrawal request on your behalf.
- Submit a Withdrawal Request: If you filed your ERC claim yourself and have not received, cashed, or deposited a refund check, you can fax your withdrawal request to the IRS using a computer or mobile device. The IRS has set up a special fax line to receive these requests, enabling the agency to stop processing before the refund is approved.
- Mail the Withdrawal Request: If you are unable to fax your withdrawal request, you can mail it to the IRS. However, this method will take longer for the IRS to receive and process.
- Respond to Audit Notices: If you have been notified that your ERC claim is under audit, you can send the withdrawal request to the assigned examiner or respond to the audit notice if no examiner has been assigned.
- Return Uncashed Refund Checks: If you have received a refund check but have not cashed or deposited it, you can still withdraw your claim. Mail the voided check along with your withdrawal request using the instructions provided by the IRS.
The IRS’s recent actions to deny high-risk ERC claims and resume processing low-risk claims are part of a broader effort to ensure compliance and protect taxpayers. Businesses that have submitted ERC claims should carefully review their eligibility and consider the voluntary withdrawal program if they have any concerns about the validity of their claims.
It is strongly advised that all businesses exercise caution and seek professional guidance when dealing with ERC claims. The complexity of the ERC and the aggressive marketing tactics used by some promoters have led to a significant number of improper claims. By taking proactive steps, such as withdrawing questionable claims and ensuring compliance with IRS guidelines, businesses can avoid potential audits, penalties, and other compliance actions.
If you have any questions or need assistance with your ERC claim, please do not hesitate to contact our office. We are here to help you navigate this complex process and ensure that your business remains in compliance with IRS requirements.