On Thursday, August 8, 2024, the Internal Revenue Service (“IRS”) announced it has revised its moratorium on Employee Retention Credit (“ERC”) claims and will begin processing claims filed between September 14, 2023 and January 31, 2024.
Furthermore, the IRS announced enhanced measures to help small businesses while preventing fraud and improper payments in the ERC program. These measures include accelerating payments for legitimate claims, intensifying audits, and initiating criminal and promoter investigations to mitigate fraudulent activity.
Accelerated Payments and Increased Scrutiny
The IRS recently announced that it has identified 50,000 valid ERC claims filed before September 14, 2023, which will be expedited for payment processing. These claims, considered low-risk, are expected to receive an initial batch of payments in September 2024, with additional payments following in the subsequent weeks. The IRS has worked to digitize and analyze the large volume of claims submitted by categorizing claims that show signs of inaccuracy into a high-risk group, while claims with minimal concern for accuracy are considered low-risk. In a June 20, 2024, news release (IR-2024-169), the IRS reported that 10% to 20% of ERC claims are considered low-risk, 60% to 70% are of unacceptable risk, and 10% to 20% are high-risk. As the IRS resumes processing new claims filed between September 14, 2023 and January 31, 2024, focus will be on processing low-risk claims, with the oldest of the low-risk claims prioritized first.
At the same time, the IRS is taking strong measures to prevent fraud and improper payments. Recently, the IRS sent out 28,000 disallowance letters to high-risk businesses, potentially preventing up to $5 billion in improper payments, while numerous audits are underway. Additionally, the IRS has initiated 460 criminal investigations, with potentially fraudulent claims amounting to nearly $7 billion, and is conducting promoter investigations to gather information about suspected tax promoters and preparers who are improperly promoting the ability to claim a credit.
Ongoing Compliance Efforts
Maintaining close contact with the tax professional community, the IRS will continue to monitor the situation to adjust its processes and filters for determining invalid claims. While the first significant wave of disallowances in 2024 undergoes evaluation, early indications suggest that errors in the process are relatively isolated and that more than 90% of disallowance notices were validly issued. Moreover, the IRS is also addressing the concerns of businesses that may have received denial letters. The agency emphasizes that taxpayers have the right to appeal denied claims and is working to ensure that all relevant taxpayers are informed about the appeals process.
As more claims are processed, the IRS will continue to accelerate payments for valid claims, intensify scrutiny on suspicious claims, and carry on compliance efforts such as the ERC Claim Withdrawal Program to further reduce the risk of improper payments.
As ERC processing continues, the Schneider Downs Credits & Incentives team will continue to monitor the situation and provide updates. If you have any questions or have received a claim denial letter or notice of audit, please reach out to your Schneider Downs contact(s) or Matthew Werner for guidance.
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