What's Happening With the Employee Retention Credit and the IRS?

The IRS continues efforts to tackle erroneous Employee Retention Tax Credit (ERC) claims. The agency says it has protected over $1 billion in revenue by increasing enforcement surrounding questionable ERC claims driven by aggressive and misleading marketing.

IRS Commissioner Danny Werfel highlighted the agency’s commitment to safeguarding small businesses against widespread abuse of the ERC program, stating in a release, “We are encouraged by the results so far of our initiatives designed to help misled businesses, and the IRS will continue our broader compliance work given the aggressive marketing we’ve seen with this credit.”

According to the agency, its Criminal Investigation division has evaluated cases involving an additional $7 billion in ERC claims. Meanwhile, the massive backlog of ERC claims and processing delays have prompted refund lawsuits from employers. 

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Following a review of the credit, the IRS recently announced that the "vast majority" of about 1 million ERC claims show the risk of being improper or carrying an "unacceptable" level of risk. The IRS plans to deny many of these claims while protecting legitimate ones.

“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 stated in a release about the effort. “Ultimately, this period will help us protect taxpayers against improper payouts that flooded the system and get checks to those truly eligible,” the Commissioner added.

Employee retention credit deadline

As reasons for its ERC enforcement success thus far, the IRS has pointed to several initiatives implemented since last fall, when it imposed a processing moratorium on new ERC claims.

For example, the IRS launched an ERC Voluntary Disclosure Program (VDP) that allowed taxpayers to correct their erroneous claims without additional penalties or interest. The VDP allowed employers to voluntarily disclose erroneous ERC claims and repay the credits received, with a potential 20% discount.

• The IRS says the VDP has generated over $225 million from more than 500 taxpayers, with additional submissions still under review. 
• The deadline for the initial program was March 22, 2024. Thousands of businesses looking to revise ERC claims at a discount will now get a second chance, as the IRS recently announced the reopening of its Voluntary Disclosure Program (VDP). 
• As Kiplinger has reported, the program, designed to help businesses fix incorrect Employee Retention Credit (ERC) claims without penalties or interest, will run for a limited time through Nov. 22. 

Another initiative, the ongoing withdrawal process for unprocessed ERC claims, has resulted in entities withdrawing $251 million in potentially false ERC claims. This process enables businesses to retract claims that the IRS has not yet processed to reduce the risk of recapture and associated penalties. 

• Over 1.4 million withdrawal claims are currently pending, according to the IRS. However, as mentioned, the agency has completed a review of many of those claims and finds the "vast majority" appear to be improper or fraudulent.
• Failure to rectify errors may result in recapture of the ERC, along with penalties and interest.

ERC audits. As of March, the IRS had identified over 22,000 improper claims through examinations, amounting to $572 million in assessments. These findings underscore the agency's efforts to scrutinize ERC claims. Additionally, the agency says thousands of audits are underway, as are investigations into abusive promoters.

Continued enforcement. While the IRS is making progress in the ERC disclosure program, the agency remains focused on potential fraudulent retention credit claims. The IRS is particularly concerned about ERC promoters spreading false information that could lead businesses to apply for credits they are not eligible for.

In addition to recapturing funds, the IRS is pursuing criminal charges against promoters and preparers engaging in fraudulent ERC practices. Kiplinger highlighted a case where the U.S. Department of Justice arrested a New Jersey tax preparer for allegedly seeking more than $124 million from the IRS. The multimillions came from filings of over 1,000 false tax forms claiming the employee retention tax credit.

The agency sent more than 12,000 letters to entities recapturing previously paid ERC claims. According to the IRS, these businesses owe 100% of the ERC paid to them, plus backdated penalties and interest.

ERC moratorium and backlog

Update: Meanwhile, in August the IRS announced plans to resume processing ERC claims following a significant moratorium on processing new ERC claims implemented last year. The IRS' decision to restart the processing of ERC claims will be welcome news for businesses waiting for their legitimate claims to be reviewed.

• The agency’s focus in recent months has been on claims from the 2021 tax year. Compliance activities for 2020 claims were set to end after Tax Day 2024, which was April 15.
• As the agency resumes processing new claims, it will do so with enhanced scrutiny and risk-analysis measures to ensure compliance.

Additionally, as Kiplinger reported, bipartisan tax legislation (passed by the U.S. House of Representatives in early 2024 but still stalled in the U.S. Senate) proposed to end the ERC. Eliminating the tax credit would offset proposed tax cuts for families and businesses in the proposed tax package.

“The IRS continues to closely monitor discussions in Congress regarding ERC and the need to extend by statute critical tools to protect against improper claims,” Werfel said in a statement regarding the legislation.

In the meantime, lawsuits have been filed against the IRS in federal court, alleging failure to issue ERC refunds. While no federal law requires the IRS to review ERC claims, the prospect of increased litigation is worth noting.

ERC tax credit status: What you can do

For businesses potentially misled by ERC promoters, the IRS offers resources to verify eligibility and navigate the program's complexities. Tools on its website, like the ERC Eligibility Checklist and FAQs, provide insights into eligibility criteria. The agency also lists common warning signs that you may be dealing with “unscrupulous promoters” of the employee retention tax credit.

Overall, to avoid potential tax penalties and legal repercussions with the ERC, businesses should exercise due diligence, consult trusted tax professionals, and ensure compliance with program guidelines.

Related

• ERC Update: IRS Temporarily Reopens Voluntary Disclosure Program
• Tax Credits in Bipartisan Tax Package Could Benefit Families, Businesses
• IRS Employees Owe $50 Million in Taxes