On August 8, 2024, the IRS provided an update on the status of Employee Retention Tax Credit (“ERC”) claims. The IRS has just moved the pendulum, and they are beginning to review claims that were submitted between September 14, 2023 and January 31, 2024. Similar to how the IRS has been reviewing and categorizing previous claims, they will focus on identifying the highest and lowest risk claims at the top and bottom end of the spectrum. High risk claims will be immediately denied while low risk claims will be paid out.
In reviewing these claims the IRS notes that businesses may receive payments for some tax quarters and denied on others due to eligibility, ERC eligibility can vary from one tax quarter to another where government orders were no longer in place or a business’s gross receipts increased. Additionally, qualified wages may vary due to a forgiven Paycheck Protection Program loan or because an employer already claimed the maximum amount of qualified wages in an earlier tax period.
In reviewing these claims, the IRS stated that they are continuing to work denials of improper ERC claims, intensifying audits and pursuing civil and criminal investigations of potential fraud and abuse. The IRS indicated that they have recently sent out 28,000 denial letters to businesses whose claims showed a high risk of being incorrect. The IRS estimates that these disallowances will prevent up to $5 billion in improper payments. Thousands of audits are underway, and 460 criminal cases have been initiated according to the IRS.
The IRS acknowledged the concerns raised by tax professionals regarding the wave of denial letters. Many of these denial letters simply indicate that a taxpayer is not eligible for ERC either because they did not suffer a significant decline in gross receipts or were not subject to a government shutdown during a tax quarter. From our experience what we have seen is that many of these denial letters contain inaccuracies as the IRS doesn’t have the requisite quarterly breakdown of the gross receipts or doesn’t take into consideration their own published guidance regarding the alternative election to qualify a 2021 tax quarter. The IRS has acknowledged errors in the notices but state that more than 90% of disallowance notices were validly issued. The IRS also reminds businesses that when they receive a denial of an ERC claim they have the option to file an administrative appeal (within thirty days of the denial). The IRS should expect many taxpayers in receipt of these disallowance letters to appeal.
The IRS has also identified 50,000 valid ERC claims and is quickly moving them into the pipeline for payment processing in coming weeks. These payments are part of a low-risk group of claims. The IRS projects payments will begin in September with additional payments going out in subsequent weeks. The IRS anticipates adding another large block of additional low-risk claims for processing and payment in the fall.
