The Internal Revenue Service has announced that after imposing a moratorium on processing Employee Retention Credit applications after September 14, 2023, it will now begin processing applications received before that date. The IRS further reported that it has a backlog of 1.4 million ERC applications totaling over $86 billion and is receiving 17,000 new applications per week. The agency is continuing the moratorium on processing new applications because it fears that lifting the moratorium would result in a flood of additional applications.

Of the ERC claims processed by the IRS, it says it has approved 28,000 claims valued at $2.2 billion and denied 14,000 claims valued at over $1 billion. That’s a denial rate of about a third of all claims. Since the moratorium began, the agency has been digitizing the information in the claims and analyzing the data. This has helped identify the most common problems in problematic claims. The IRS has issued guidelines that list seven warning signs that indicate an ERC claim may be bogus.

The IRS’s analysis of claims found that 10 to 20% of claims were high risk and denial notices will be issued in the coming weeks, some of which have already been issued. The IRS concluded that 60 to 70% of claims had an unacceptable level of risk and will undergo additional analysis to more accurately evaluate the claims. Only 10 to 20% of claims were deemed low risk and the IRS indicated it would begin processing those returns. Payments would be made this summer, with the oldest claims processed first.

If a calculation error is discovered while processing applications, the IRS will adjust the payment to compensate for the calculation error. All applications filed before September 14, 2023 will be processed first.

Voluntary Disclosure Program

The IRS’s voluntary disclosure program for ERC claims ended in May 2024. It resulted in 2,600 applications totaling $1.09 billion. The agency said it could restart the program at a reduced rate for taxpayers with claims already processed who want to avoid future IRS compliance actions.

IRS Withdrawal Program

The IRS’s ongoing repossession program initially included letters to taxpayers for the 2020 tax year. Repossession results in the agency treating the ERC claim as if it had never been filed, with no interest or penalties.

The IRS reported in June 2024 that the withdrawal program resulted in 4,800 companies withdrawing $531 million in ERC claims. For the first round of letters, the agency found that more than 12,000 companies filed over 22,000 improper claims that resulted in $572 million in levies. The letters for tax year 2021 will generally address larger claims.

Enforcement activity

The IRS says it is currently investigating thousands of ERC claims. As of May 31, 2024, the agency has initiated 450 criminal investigations involving nearly $7 billion in potentially fraudulent claims. Thirty-six investigations resulted in indictments in federal court. Sixteen investigations resulted in convictions. Of the seven convictions, the average sentence was 25 months. The service is also investigating organizers and tax return preparers for improper activities.

Summary

While processing ERC claims is at least partially underway, it is likely to be a lengthy process given the backlog facing the IRS. Efforts in Congress to extend the statute of limitations for ERC claims and shorten the filing deadline for ERC claims have so far been unsuccessful.

The current filing deadline for the 2021 tax year is April 15, 2025. The IRS withdrawal program is still available to taxpayers whose claims are denied. The IRS has also indicated that it may reinstate the voluntary disclosure program. Taxpayers who now have doubts about the validity of their ERC claims may also consider filing an amended tax return.

Taxpayers who continue to believe they have valid ERC claims may still have to wait a significant amount of time until the IRS processes those claims and completes its analysis of the claims it has identified as at risk. The agency has stated that taxpayers do not need to take any action at this time, nor will information on the status of processing specific ERC claims be available through the IRS hotline.

For taxpayers who do not want to wait for the IRS to process their application, there may be an opportunity to speed up the process somewhat by filing a refund request. Given the high percentage of ERC applications where the IRS has identified potential problems, at least on a preliminary basis, taxpayers should work with trusted tax professionals to ensure they have the facts and documents to support their position in the event that a denial letter is ultimately issued and the taxpayer wishes to appeal or file a refund request.

The IRS has published an ERC Eligibility Checklist and a list of ERC Frequently Asked Questions to further assist taxpayers in assessing the eligibility of their ERC claims.