Employee Retention Credit (ERC) Update: Payouts for Low-Risk Claims are Coming But the Moratorium is Here to Stay

At a glance

• The main takeaway: The IRS will begin denying high-risk ERC claims submitted before the September 14, 2023 moratorium while ramping up reviews and payouts of low-risk, legitimate claims as the moratorium on new claims remains in place.
• Impact on your business: Companies waiting for refunds as a result of the processing of ERC claims likely still have a long road ahead, particularly for those filed after the moratorium was put into effect. 
• Next steps: The IRS advises that Taxpayers with active ERC claims do not need to do anything additional at this time. Consult an Aprio advisor for questions about your ERC claims.

The full story:

On June 20, 2024, the IRS released a new update to its progress and policies related to Employee Retention Credit (ERC) claims. In this newest release the IRS underscores its continued concern for high levels of fraudulent claims and announces additional compliance and processing efforts.

IRS announces a new round of processing for lower-risk claims alongside plans to deny high-risk claims

Since enacting the moratorium on reviewing and paying out ERC refund claims filed after September 14, 2023, the IRS has focused on digitizing and analyzing its backlog of claims. The agency revealed it processed 28,000 claims with over $2 billion dollars being refunded during this period, but also disallowed claims filed worth more than $1 billion.

The focus of this review period was to characterize and assess risk levels for improper claims, as defined below, to guide next steps for processing the remaining claims filed before the moratorium.

IRS defines risk levels for ERC refund claims

The IRS has outlined three risk levels for improper claims:

• High-risk: clear warning signs the claim did not meet established qualifying criteria. The IRS estimates between 10% and 20% of more than 1 million claims fall into this category. Denials for most of these claims will be issued in the coming weeks.
• Moderate-risk: risk indicators suggest the claim requires further review. The vast majority of claims, 60% to 70%, fall into this category, which includes any claim with associated risk indicators, that were not elaborated upon in the IRS release. These claims will go through additional IRS compliance review.
• Low-risk: likely legitimate claims by small businesses. The IRS estimates between 10% and 20% of claims are from small businesses that are only being further penalized by the delays in claim processing. As a result, the IRS is ramping up and prioritizing processing of these claims, beginning with the oldest. Low-risk claims will require a final review by the IRS to catch and adjust for calculation errors, with the goal to begin issuing payments later this summer.

The moratorium and withdrawal process remains intact while the IRS weighs reopening the Voluntary Disclosure Process

The IRS confirmed the moratorium and the Special IRS Withdrawal Program will remain in place, and there are no plans to end either. Despite having been in effect for nine months, businesses continue to submit new claims amounting to more than 17,000 per week. IRS Commissioner Danny Werfel worries that “ending the moratorium might trigger a gold rush by aggressive marketers that could lead to a new round of improper claims,” which would only further delay processing times for legitimate claims.

Any taxpayer with an unprocessed claim may pursue the withdrawal process to remove their claim from the queue, no questions asked (or penalties applied).

Due to the exponentially rising number of erroneous ERC claims identified through the recent compliance efforts, the IRS is also considering reopening the Voluntary Disclosure Program, with adjustments, to provide an avenue for taxpayers to voluntarily return processed claims and avoid a potential future audit. The agency did not provide details on when, or if, the program would reopen or how it would differ from the program that ended in March 2024.

Next steps for taxpayers

The IRS is urging taxpayers with outstanding ERC claims to be patient and avoid contacting any IRS toll-free lines seeking additional information; in most cases, there is no new information available. The agency states it is continuing to work through existing claims in order to diligently assess, categorize, review, and adjust as necessary.

The bottom line

This latest update from the IRS reaffirms its commitment to clearing the ERC backlog while attempting to weed out improper and erroneous claims. Werfel stated that the ERC is considered, “one of the most complex credits the IRS has administered,” which has directly contributed to the lengthy processing times and high levels of erroneous claims.

In light of the aggressive and ongoing marketing efforts by unqualified ERC promotors, the IRS strongly urges taxpayers with questions about the ERC to consult knowledgeable tax professionals. Aprio is available to discuss any of the topics above.

Schedule a consultation with an Aprio advisor today, or contact us at ERC2024@Aprio.com.

Related Resources

ERC Update: Voluntary Disclosure Program Ended, IRS Special Withdrawal Program Continues

Employee Retention Credit (ERC) Update

The IRS is Preparing to Audit ERC Claims – Are You Ready?