2024 Update: IRS Resumes Processing Employee Retention Credit Claims

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The IRS announced that it is resuming the processing of certain claims filed under the Employee Retention Tax Credit (ERTC) program, even as it scrutinizes claims and pursues civil and criminal investigations into potential fraud and abuse. Although the moratorium on processing new ERTC claims will continue, certain claims filed between Sept. 14, 2023, and Jan. 31, 2024, will now be processed.

Increased ERTC Scrutiny and Fraud Prevention

The IRS intensified its audits and reviews of ERTC claims following a June review that confirmed a high rate of improper claims. In recent weeks, 28,000 disallowance letters were sent to businesses whose claims were deemed high-risk, preventing up to $5 billion in improper payments. Thousands of audits are underway, and 460 criminal cases have been initiated. However, the IRS separately identified 50,000 ERTC claims that were filed during the aforementioned period which are now being processed for payment in the coming weeks.

Due to the complexity of the ERTC, the IRS is carefully managing disallowances and payments to minimize the risk of improper claims. The IRS stated that it views this as a balanced approach to address the needs of businesses with legitimate claims while curbing a wave of improper claims fueled by aggressive and misleading marketing.

Historical Context and Current Initiatives

The ERTC, designed to help businesses retain employees during the COVID-19 pandemic, has been subject to significant fraud and misuse. In response, the IRS halted processing claims filed on or after Sept. 14, 2023. The IRS then began digitizing and analyzing the large volume of paper-based claims to assess risk and identify indicators of improper claims. This analysis provided the agency with additional insights, allowing the IRS to improve the accuracy of ERTC claims processing.

The IRS is also implementing several initiatives to address fraudulent claims and promoter abuses:

• ERTC Claim Withdrawal Program: Over 7,300 entities have withdrawn $677 million in unprocessed claims.
• ERTC Voluntary Disclosure Program: More than 2,600 applications disclosed $1.09 billion worth of credits.
• Criminal Investigations: As of July 1, 2024, 460 criminal cases involving nearly $7 billion in potentially fraudulent claims have been initiated, resulting in 37 federal charges, 17 convictions and nine sentences averaging 20 months.
• Promoter Investigations: The IRS is investigating abusive tax promoters and preparers; hundreds of referrals have been received. Civil and criminal enforcement efforts are ongoing.
• Audits: Thousands of ERTC claims are currently under audit.

As the IRS continues to process additional ERTC claims, businesses may receive payments for some valid tax periods while others remain under review. The IRS said it is committed to balancing the protection of taxpayers from improper claims with more timely processing and payment of legitimate claims, ensuring the integrity of the ERTC program.

Uncertainty Over IRS Measures Flagging Risk

The forms filed by employers to request refunds through the ERTC program do not give the IRS much information beyond the dollar amount of the refund itself. As a result, the basis used by the IRS to assess levels of risk remains unclear. Anecdotally, we have learned of two measures the IRS may be using to measure risk for each claimant: (a) cross-referencing to determine the presence of actual employees (using existing information to which the IRS has access) and (b) confirming the previous conduct of a trade or business by the claimant. While the former would seem to indicate an impropriety, the latter may simply be the result of segmented ownership structures involving certain related entities that may be “disregarded” for federal income tax purposes. For example, the trade or business of a single-member LLC would be reported on the individual owner’s Form 1040, Schedule C, not on a partnership Form 1065. Such ownership structures are highly common, and a focus on previous income tax filings for a disregarded entity will not yield reliable intelligence about ERTC risk factors. Therefore, employers may be required to wait even longer for refunds as they are forced to correspond with the IRS on claims that are denied inappropriately for this reason.

Final Thoughts

The recent IRS guidance is a positive development for certain employers who filed ERTC claims between Sept. 14, 2023, and Jan. 31, 2024. Regardless, employers may wish to speak with their legal counsel to evaluate other options that could compel the U.S. government to pay the employer’s refund claim.

For more information, connect with one of our CBIZ tax professionals today. 

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