Earlier this month, the IRS provided an update on the status of Employee Retention Tax Credit claims processing, enforcement activities, and ongoing monitoring. The agency is continuing to work through the backlog of claims submitted before the processing moratorium announced last September. Since that time, the IRS has been carefully reviewing claims, increasing audits, and pursuing civil and criminal investigations for fraud and abuse. This detailed work has confirmed that the fraud rate amongst these claims was quite high. Beyond enforcement, the agency will start paying low-risk (only 10%-30% of the total) claims quickly. There are 50,000 low-risk claims, which will be reviewed and paid out starting in September. To help clients, prospects, and others, WhippleWood CPAs have provided a summary of the key details below.
Ongoing Compliance Efforts
Through ongoing compliance efforts, the IRS has sent out over 28,000 disallowance letters to those who claim to demonstrate a high risk of errors. It is estimated the move will prevent up to $5B in improper payments from being made. Thousands of audits are also underway and more than 460 criminal cases are pending. Additional traction has been gained through other compliance programs, including:
- Claim Withdrawal Program – This program, which impacts unprocessed claims, has led to 7,300 entities withdrawing claims for more than $677M.
- Voluntary Disclosure Program—The IRS received more than 2,600 applications from companies that disclosed $1B worth of credits through this program, which ended in March 2024.
- Criminal Investigations—The IRS has initiated over 460 criminal cases involving suspected fraudulent claims of over $7B. 37 investigations resulted in federal charges, 17 convictions, 9 judgements, and an average sentence of 20 months.
- Audits – There are currently thousands of claims under an IRS audit.
“The Employee Retention Credit is one of the most complex tax provisions ever administered by the IRS, and the agency continues working hard to balance our work to protect taxpayers from improper claims while also making payments to qualifying businesses,” said IRS Commissioner Danny Werfel. “It has been a time-consuming process to separate valid claims from invalid ones. During the past year, we maintained a steady cadence of both ERC approvals and disapprovals.”
ERTC Claim Payment to Restart
News that the IRS will start paying ERTC claims again is significant as it has been nearly a year since the processing moratorium was announced. Many taxpayers have been wondering about claim status and when the agency would start sending payments again. As mentioned above, there are 50,000 valid claims the agency will start processing in the coming weeks and remit payment. Taxpayers should expect to see payments in September.
Since claims have been divided into three groups: claims the agency is rejecting (10 – 20% of claims), claims the agency will pay quickly, and claims that require more examination (60 – 70% of claims). This means that only 10%-30% of the total claims will be paid out in the coming weeks. For this reason, it is likely many taxpayers will have to continue waiting for payment. Once completed, the IRS will then start processing claims submitted between September 14, 2023, and January 31, 2024. It is expected payments for eligible claims will be made shortly thereafter.
It is important to remember that eligibility was determined on a quarterly basis, so it is possible payment may be received for some quarters and not others. This is necessary because as the program changed, so did the eligibility requirements. As such, a business may have qualified for several quarters in one year and not in the following year. Naturally, the IRS carefully reviews all claims and requests patience from taxpayers to work through the complexities.
High-Risk Claims
For those identified as high risk, the IRS process simply rejects the filing. Taxpayers do not have any recourse through the audit process. Instead, they must file a claim with the IRS Office of Appeals or file a suit in district court. Even the IRS estimates that 25% of their rejections will be for valid claims. The appeals process is more accessible than going to court, but it is still more burdensome than handling the claim through an IRS audit process. So don’t think simply because a rejection was initially received that there are no options; this is simply not true.
Contact Us
The Employee Retention Tax Credit update provides welcome news for taxpayers wondering when legitimate claims will be paid. It is also clear that ongoing enforcement efforts have been quite successful at eliminating inappropriate or false claims. If you have questions about the information outlined above or need assistance with another tax or accounting issue, WhippleWood CPAs can help. For additional information, call 303-989-7600 or click here to contact us. We look forward to speaking with you soon.