Background

The Employee Retention Credit (“ERC”) was born in 2020 from the Federal government’s desire to provide a lifeline for businesses to stay open and keep people employed during the Covid-19 pandemic, which paralyzed the economy in early 2020. The ERC was one of the ways Congress offered cash to suffering businesses with few questions asked. It promised as much as $26,000 for each employee kept on a payroll. The ERC was particularly easy, because businesses only had to fill out a few additional lines to the quarterly payroll tax form they already had to file. Near the time of enactment, the Congressional Budget Office and the staff of the Joint Committee on Taxation estimated the provision would increase federal deficits by $55 billion.

Promoters quickly caught on to gray areas in IRS guidance that could be used to file aggressive claims. Scores of “new” ERC tax specialists promising large payoffs popped up to push business owners – through persistent emails, phone calls, radio ads – into filing ERC claims based on the promoter’s standard “tax opinion” for a fee. The program has cost the government roughly $230 billion, more than four times early projections. Costs of the program have been estimated to grow to $550 billion in the future. The IRS’s backlog of unprocessed claims grew so unmanageable that in September 2023 it announced a moratorium on processing new claims while it gets a handle on the problem. It took other unprecedented measures to try to reduce the number of fraudulent claims, including the ERC Withdrawal Program and the Voluntary Disclosure Program.

What's New

Most recently, in its June 20, 2024 news release IR-2024-169, the IRS provided an update on various matters related to the ERC, including whether it will lift the moratorium on processing new ERC claims submitted after September 14, 2023. In the months preceding this release, the IRS digitized 1 million claims worth about $86 million and finished a detailed review of these claims from which it will use data to strategically process pending claims.

What the IRS determined from its review of these claims is:

• 10-20% of pending claims are “High Risk” – showing clear signs of being erroneous. The IRS plans to deny these in the coming weeks.
• 60-70% of claims show an “Unacceptable Level of Risk” – the IRS plans to conduct an additional analysis on these to gather more information to help resolve valid claims and protect against improper claims.
• 10-20% of pending ERC claims are deemed “Low Risk”, and the IRS plans to process these claims accordingly, with some of the first payments to go out later this summer (though at a much slower pace than ERC claims were paid initially).

Other takeaways from the news release include the following:

• Since the start of the moratorium on September 14, 2023, the IRS has processed 28,000 claims worth $2.2 billion and has disallowed more than 14,000 claims worth more than $1 billion.
• Also, since September 14, 2023, the IRS has received an average of over 17,000 ERC claims per week, and its ERC claim inventory now sits at 1.4 million.
• Criminal investigations: As of May 31, 2024, IRS Criminal Investigation has initiated 450 criminal cases, with potentially fraudulent claims worth nearly $7 billion. In all, 36 investigations have resulted in federal charges so far, with 16 investigations resulting in convictions and seven sentencings with an average sentence of 25 months.
• Audits: The IRS has thousands of ERC claims currently under audit.
• Promoter investigations: The IRS is gathering information about suspected abusive tax promoters and preparers improperly promoting the ability to claim the ERC. The IRS’s Office of Promoter Investigations has received hundreds of referrals from internal and external sources. The IRS will continue civil and criminal enforcement efforts of these unscrupulous promoters and preparers.
• The ERC Withdrawal Program remains available to taxpayers.

What Businesses Should Do

If your business previously filed and received ERC refund claims from the IRS, you should assume that you may be receiving an audit notice from the IRS about your claims. Many businesses that used third-party promoters to process their claims should anticipate that the promoters will not adequately support the basis of that claim. The IRS has extended its time to audit an ERC claim to five years. In order to prepare for a likely audit, such businesses should carefully review its ERC claim filings to determine whether the documents provided by their third-party promoter can withstand an IRS audit, especially those claims relying on governmental orders that caused a partial suspension in your business activities.

If you believe that you have filed an ERC claim improperly or have concerns whether your prior ERC filing could withstand an IRS audit, Munsch Hardt Kopf & Harr’s team has deep experience assisting clients through the various ERC challenges described above. In addition, there is still time to participate in the voluntary withdrawal program. With more than 1.4 million unprocessed ERC claims, the claim withdrawal process remains an important option for businesses who may have submitted an improper claim. In addition, although the IRS’s Voluntary Disclosure Program, referenced above, has closed, the IRS is currently considering reopening this program at a reduced rate for those with previously processed claims to avoid future compliance action by the IRS.