IRS Update on ERC Tax Credit Claims

The IRS updated information about pending ERC tax credit claims on June 20^th in IR-2024-169. Highlights are that the IRS will resume processing of “low risk” pending ERC claims “later this summer,” will send out denial letters to “highest risk claims,” and will hold the remaining 60-70% of claims which require more analysis by the IRS to determine their validity. The IRS says “no action steps” should be taken by those employers with pending ERC claims. Do not call the IRS to ask about them, simply “be patient” and await further word /correspondence from the IRS in the future.

Here is AccuPay’s analysis based on having been intimately involved in the ERC program since its inception in the spring of 2020 (though it became “red hot” when legislation was enacted late 2020 to permit recipients of PPP loans to also apply for ERC tax credits).

“THIS IS ONE OF THE MOST COMPLEX CREDITS THE IRS HAS HAD TO ADMINISTER”

IRS Commissioner Werfel was quoted in the IRS update about the complexity level of the ERC tax credit. I agree that the ERC credit has complexity as to both “eligibility” criteria as well as complex calculations, BUT what made the ERC tax credit returns difficult for the IRS to “sort” between valid claims verses fraud and “overreach” was the manner in which the IRS managed the ERC program. Employers filed amended 941X payroll tax returns which contained very little information about the ERC claim other than the dollar amount of “qualified wages” and “qualified healthcare costs.” The very limited amount of information required on the ERC claim/941X makes it impossible for the IRS to determine the validity of the claims—-and that same lack of details/information required to claim the ERC also made it very easy for “bad actors” to become “ERC consultants/experts” and file billions of dollars in ERC claims for employers. Many/most of these “bad actors” did not have much knowledge about the ERC complexity/law/IRS guidance, but that lack of knowledge did not prevent the bad actors from being viewed as “experts” by innocent employers. Most of these bad actors were excellent in sales and in developing teams of promoters/sales reps who had connections in their local communities, business networks, etc, who would receive a “cut” of the ERC consulting firm’s contingent fee for referring employers to them. Since the IRS did not have adequate screening/review processes in place for the influx of ERC claims coming in, IRS computers simply cranked out 6 and 7 figure refunds to employers without any way to review the validity of the ERC claims. The bad actors would then promote how much ERC money they had received for their clients as promotions to other employers—–“I was able to qualify a client which 7 other firms could not qualify,” was a pitch that I heard from one promoter. The promoters threw CPA’s “under the bus” as not knowing how to calculate and file ERC claims. THE ERC STATUTE/IRS GUIDANCE IS COMPLEX BUT FILING THE 941X CLAIMS WAS NOT—WHICH RESULTED IN BAD ACTORS AGGRESSIVELY SELLING EMPLOYERS AND FILING INVALID ERC CLAIMS WITH THE IRS.

THE IRS ANALYZED OVER 1 MILLION ERC CLAIMS AND DIVIDED THEM INTO 3 RISK POOLS

IR-2024-169 indicates that the IRS digitized and analyzed over 1 million ERC claims and somehow (no details of criteria) divided them into the following 3 buckets/risk pools:

1. 10-20% of the total pending claims have a high risk of being improper/invalid claims—-the IRS plans on sending “denial letters” to “tens of thousands” of employers in the coming weeks.
2. 10-20% of the total pending claims are categorized as having a “low risk” of being incorrect and the IRS plans on processing and issuing refunds on those claims yet this summer—-refunds will come out slowly on these claims.
3. 60-70% of the total pending claims are “in the middle” as to “ERC risk” and will require further analysis by the IRS—they will be refunded out or denied based on IRS conclusions after further review.

THE IRS IS NOT TELLING ANYBODY HOW THEY HAVE DEVELOPED THEIR RISK TIERS—THE 941X FORMS DO NOT PROVIDE SUFFICIENT DETAILS WITH WHICH TO ASSIGN RISK CRITERIA—THIS HAS BEEN THE PROBLEM ALL ALONG!!

IRS RELEASES SOME STATS ON ERC CLAIMS—-PROCESSING LEVELS AND RECEIPT OF NEW ERC CLAIMS DURING THE PAST 10 MONTHS

The IRS says it has processed 28,000 ERC claims during the past 9-10 months, since they issued the “no more processing moratorium” on September 14, 2023—-which equates to processing 600 or so ERC claims a week during the past 9-10 months. The IRS continues to receive 17,000 new ERC claims weekly even now, and currently has over 1.4 million pending ERC claims in their inventory—-of which 880,000 claims were received prior to the September 14, 2023 “moratorium.” The IRS says that it used the past 9-10 months to digitize and improve their review/screening systems during the processing moratorium (they obviously should have had better systems in place 3 to 4 years ago). The IRS indicated that it has received a total of 3.6 million ERC claims since the beginning of the program and have already paid out nearly $240 Billion in refunds, three times their projection of the ERC tax credit cost, with 1.4 million claims sitting in inventory.

CLAIMS FILED AFTER THE MORATORIUM—WHAT HAPPENS TO THEM?

The IRS issued a “moratorium” on September 14, 2023, telling employers that any ERC claims filed after September 14, 2023 would not be processed until “after the end of the year” (2023). The moratorium further indicated that processing would continue on the 880,000 ERC claims pending at the IRS as of September 14, 2023, but on a “slower pace” than before—perhaps 180 days to refund out as opposed to 90 days. IR-2024-169 has revealed that pre-moratorium ERC claims have barely been touched with very few refunding out—-the “slower pace” became “inactivity” based on the IRS recent stats. The IRS is now indicating that they do not plan on processing any ERC claims filed after September 14, 2023 without asking Congress for “help” in what to do with the ERC claims filed post moratorium. It sounds like the IRS is wanting Congress to help them make those claims go away, to include further consideration of the House passed HR 7024, which would have made January 31, 2024 as the “new deadline” for ERC filings, a so- called “ERC Killer Bill.” The Senate has yet to take up this legislation which passed the House in a bi-partisan manner in January of this year. The current statute/deadline for filing of ERC claims is April 15, 2025 for claims based on year 2021 ERC qualifying wages, with year 2020 claims having expired as of April 15, 2024. Nobody knows what will happen to the post September 14, 2023 moratorium claims.

HERE IS WHAT THE IRS IS NOW RECOMMENDING TO THOSE EMPLOYERS WITH PENDING ERC CLAIMS

No further action steps are needed by those with pending claims. BE PATIENT and do not call the IRS phone lines—–WAIT for the IRS to contact you. They also indicate that some employers may choose to have their pending claims reviewed for accuracy/validity, and employers who feel their claims are invalid may withdraw them if they choose. The IRS also indicated that it may reopen the “voluntary disclosure program” which ended March 22, 2024, a program in which employers could repay their previously received ERC tax credits on favorable terms.

WHAT IF YOU HAVE RECEIVED ERC TAX CREDIT REFUNDS BUT NOW BELIEVE THEY WERE NOT VALID CLAIMS?

For a time period from January of 2021 through early Summer of 2023, the IRS computers were cranking out 6 to 7 figure ERC tax credit refunds without much review at all. The form 941X claim form did not provide sufficient information to the IRS to determine whether the claims were “good or bad”–and this is especially true as to claims based on “suspensions by government orders,” to include “supply chain” qualifiers, which are seldom valid. So, the IRS distributed approx $240 Billion in ERC refunds through mid-summer of 2023 without knowing if they were valid claims or not. Bad actors claimed very broad approaches to “COVID ordered suspensions” since they generally created massive refunds. These “bad actors” would then collect 20-25% or more of the ERC refunds for filing these claims without much due diligence, with their army of sales reps receiving a portion of these ridiculously high fees. Many of the bad actors made it seem so easy, “We can qualify you based on 15 minutes of your time” with a brief “checklist” of questions. Bad actors often bragged about how they could qualify employers who had been told they did not qualify by their CPA —providing references of other employers who they helped get huge ERC refunds. The employers assumed the “bad actors” were ERC experts, not realizing that the IRS refunded virtually everybody for about 2 ½ years—-bad claims, dubious claims, valid claims and fraudulent claims, the IRS simply refunded them from January 2021 through early summer of 2023.

Our understanding is that the IRS is auditing some already refunded ERC claims, which could result in assessment of taxes, penalties and interest if the IRS determines they were invalid claims. Employers who have already received ERC refunds may choose to have them reviewed for eligibility and calculations by their CPA or other trusted tax advisor, if their ERC claims were made by “aggressive promoters.” As mentioned above, the IRS is considering opening up a new “voluntary disclosure program” for those who have received ERC funds and determine they did not qualify for them—time will tell on that!

BOTTOM LINE—-WORST IRS MESS I HAVE EVER SEEN IN 50 YEARS OF TAX PRACTICE

The combination of IRS mismanagement (due to inadequate filing procedures and poor or zero review/screening of ERC claims) COMBINED WITH greed from thousands of bad actors equals THE WORST IRS MESS I HAVE EVER SEEN.

MORE TO COME ABOUT THIS MESS!!

We continue to stay abreast of “all that is going on as to ERC tax credits,” via articles, webinars, online conversations by ERC experts, many of whom are lawyers who have specialized in ERC tax credits since they were established in law. Since we are writing this PayDay just a few days after the June 20^th IRS update on ERC, we know that much more is to come from the IRS, possibly Congress, and certainly online lawyers/CPA’s about ERC best practices. We will update our clients and others about all we know as the ERC program continues to evolve. Until then, visit our website for our previous articles regarding ERC tax credits or contact me directly at larry@accupay.com.