Four years later, the Internal Revenue Service (IRS) is still deep in the trenches of navigating the aftermath of the Employee Retention Credit (ERC) program. The tax benefit was originally part of President Donald Trump’s 2020 pandemic relief legislation but has since taken on a life of its own. Essentially, the incentive allows small businesses to collect up to $28,000 per employee annually (or $7,000 per quarter) if the company was impacted by COVID-19, per the U.S. Department of the Treasury.
As you can imagine, the IRS has received an overwhelming amount of ERC claims in recent years. In fact, the IRS is in possession of 1.4 million ERC claims that are still waiting to be processed. However, as part of their efforts, the IRS has uncovered “tens of thousands” of improper claims, according to a press release.
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“The completion of this review provided the IRS with new insight into risky Employee Retention Credit activity and confirmed widespread concerns about a large number of improper claims,” IRS Commissioner Danny Werfel revealed on Thursday. “We will now use this information to deny billions of dollars in clearly improper claims and begin additional work to issue payments to help taxpayers without any red flags on their claims.”
Since Sept. 2023, the IRS has analyzed more than a million ERC claims that are collectively worth upwards of $86 billion. As a result, the agency categorized up to 20 percent of these fillings as “the highest-risk group.” These ERC claims will be denied due to showing “clear signs of being erroneous” and “falling outside the guidelines established by Congress,” the agency explained.
“This is one of the most complex credits the IRS has administered, and we continue to ask taxpayers for patience as we unravel this complex process,” Werfel continued. “Ultimately, this period will help us protect taxpayers against improper payouts that flooded the system and get checks to those truly eligible.”
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For the 60 to 70 percent of ERC claims that were flagged as an “unacceptable level of risk,” additional analysis and information is needed to determine whether or not these reports are valid. For the estimated 10 to 20 percent that were deemed “low risk,” the IRS plans to initiate processing payments soon.
“The IRS anticipates some of the first payments in this group will go out later this summer. But the IRS emphasized these will go out at a dramatically slower pace than payments that went out during the pandemic period given the need for increased scrutiny,” reads the statement.
In the interim, the IRS advises taxpayers with outstanding ERC claims to wait for further instruction from the agency. If more information is needed, you’ll be contacted by the IRS in an official capacity.
“These complex claims take time, and the IRS remains deeply concerned about how many taxpayers have been misled and deluded by promoters into thinking they’re eligible for a big payday. The reality is many aren’t,” added Werfel. “People may think they are on safe ground, but many are simply not eligible under the law."
