The IRS has announced that it will start processing some Employee Retention Credit (ERC) claims that were previously on hold due to a temporary pause. Additionally, the IRS has sent out 28,000 denial letters to businesses whose claims were found to be invalid. The agency is also preparing to pay 50,000 valid claims related to this pandemic-era credit.
Complexity of ERC Claims
IRS Commissioner Danny Werfel explained that these ERC claims are complicated because they involve various tax law changes, different time periods, and different payment amounts. The IRS has been carefully reviewing each claim individually, which has slowed down the approval process. However, the agency is now taking steps to speed up the process and reduce the backlog of pending claims.
Moratorium on ERC Claims
To manage the overwhelming number of claims, the IRS implemented a moratorium on processing ERC claims submitted after September 14, 2023. This pause allowed the agency to focus on digitizing and analyzing the large number of applications, especially in light of aggressive marketing by promoters who encouraged businesses to apply for the credit, sometimes inappropriately. The IRS will now begin processing claims that were filed between September 14, 2023, and January 31, 2024.
Background on the ERC
The Employee Retention Credit (ERC) was designed to support businesses during the COVID-19 pandemic, allowing them to continue paying employees even when their operations were partially or fully suspended due to government orders or a significant drop in revenue. The credit was available for eligible businesses from March 2020 to September 2021, with an extension to December 2021 for certain startup businesses.
Disallowance Letters and Compliance Efforts
The IRS sent out 28,000 disallowance letters to businesses whose claims were deemed likely to be incorrect, potentially preventing up to $5 billion in improper payments. While some tax professionals have raised concerns about errors in these letters, the IRS believes that over 90% of the disallowances were justified. Businesses that receive a denial can file an appeal with the IRS.
Valid Claims to be Paid
The IRS has identified 50,000 valid ERC claims and expects to start issuing payments for these claims, totaling about $5 million, in September. The agency is also continuing its efforts to address fraudulent or incorrect claims, which include audits and investigations into tax promoters who may have improperly advised businesses to apply for the ERC.
The IRS is now focusing on carefully processing ERC claims, rejecting those that are likely incorrect, and preparing to pay out valid claims. Simultaneously, the agency is intensifying efforts to combat fraudulent activities related to this credit.