IRS Moves to Address Employee Retention Credit (ERC) Backlog Amid Ongoing Challenges

In June 2024, the IRS announced a new phase in processing Employee Retention Credit (ERC) claims to tackle a significant backlog that has accumulated since a moratorium on new claims was declared in September 2023. This moratorium was implemented after the IRS identified a substantial number of ineligible claims driven by aggressive marketing from “ERC mills.” These mills promoted meritless claims, hindering the processing of legitimate claims for deserving businesses.

A detailed review by the IRS of over one million ERC claims, totaling more than $86 billion, revealed a high number of claims with an unacceptable level of risk. As a result, the IRS will now deny claims that show clear signs of being erroneous. Claims deemed to pose a high level of risk will undergo further scrutiny. Meanwhile, the lowest-risk claims will be processed, but this will occur at a slow pace, starting with the oldest claims first. Payments on these claims are expected to begin in the next few months, but the IRS warns that the process will be slow due to increased scrutiny.

The IRS continues to receive thousands of new claims weekly despite the moratorium. The September 2023 moratorium on new ERC claims remains in effect with no clear end in sight. For applicants who believe their claims may be erroneous, the ERC withdrawal program is still available. Although the ERC Voluntary Disclosure Program has closed, the IRS indicated it might reopen in the future under less favorable terms.

Based on the current regulations, businesses can still apply for the ERC until April 15, 2025. However, the IRS is advocating for Congress to pass legislation that would end the acceptance of new ERC claims. In addition, the IRS wants to extend the statute of limitations for reviewing these claims. Proposed legislation from early 2024 suggests a six-year review period from the date of the refund check, as opposed to the standard three years from the date of the claim. This extension would provide the IRS with additional time to audit the claims under review.

The IRS indicates that many claims showed an unacceptable level of risk, necessitating further analysis and scrutiny. After identifying many claims as clearly ineligible or potentially fraudulent, the IRS expects to deny a large number of high-risk claims. High-risk claims are flagged for issues such as overstating the number of employees, incorrect ERC calculations, claims based on supply chain disruptions, and businesses claiming ERC for periods beyond their eligibility. Claims involving partial business shutdowns are also being flagged as suspicious.

The IRS reassures taxpayers that legitimate claims will still be processed, although taxpayers will have to be patient. Claims with no eligibility warning signs, received before last September, will be processed judiciously, starting with the oldest. At this point, the IRS is not processing claims submitted after the September 2023 moratorium. As the IRS navigates these challenges, they remain committed to improving taxpayer services and resolving the backlog of ERC claims.

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