On June 20, 2024, the IRS issued a long-awaited news release (IR-2024-169) that announced the next phase of ERC processing.
Since imposing a moratorium last September on processing ERC refund claims, the IRS has been working to identify and prevent potential errors and fraud, with its efforts so far involving the use of technology and advanced data analytics.
Moratorium Review Process
Since the moratorium started on September 14, 2023, the IRS has conducted a detailed review of more than one million ERC claims representing more than $86 billion and has identified significant discrepancies. These discrepancies led the agency to begin to categorize claims into three groups based on risk level.
- Level 1 – High Level of Risk
- 10% – 20% of claims fall into this group
- Claims within this group will be denied – because they are those that clearly fall outside the guidelines established by Congress, resulting in immediate ineligibility.
- Level 2 – Medium / Unacceptable Level of Risk
- 60% – 70% of claims fall into this group
- Claims within this group will require additional analysis to ensure compliance.
- Level 3 – Low Level of Risk
- 10% – 20% of claims fall into this group
- Claims within this group appear to be legitimate and will be processed with heightened scrutiny to protect against improper payments. The agency anticipates some of the first payments in this group to be release later this summer; however, these will go out at a dramatically slower pace than payments went out during the pandemic period.
Begging for More Time
The U.S. House of Representatives passed the Tax Relief for American Families and Workers Act of 2024 on January 31, 2024, (the “Act”). Under the Act as currently written, new ERC claims are prohibited after January 31, 2024. Since January 31 has already passed, the Act could be revised to include a new deadline, which would likely be sometime before calendar-year end. The IRS continues to advocate for Congress to pass legislation that would not only end additional ERC claims but also extend the statute of limitations on assessment of these claims. Legislation proposed at the beginning of 2024 included a six-year period for IRS review from the date of the refund check, as opposed to the standard three years from the date of the claim. This additional time would benefit the IRS, since the agency currently has thousands of claims to review with a very short time left to do it. The statute of limitations on assessment for 2020 periods expired in April 2024; and the period for 2021 claims will expire in April 2025.
Next Steps
Taxpayers with claims do not need to take action at this point and should await further notification from the IRS. The IRS cautioned taxpayers who filed ERC claims that the process will take time – highlighting that processing speeds will not return to levels that occurred in 2023 and that calling IRS toll-free lines will not be fruitful, since additional information is generally not available as processing work continues.
IRS Reminder
As the agency continues intensifying audits and criminal investigation work in this area, the IRS continues to urge employers with pending ERC claims to consider a separate Withdraw Program that allows then to remove a pending ERC with no interest or penalty. Claims that are withdrawn will be treated as if they were never filed, and the IRS will not impose penalties or interest.
The IRS will maintain a moratorium on processing new ERC claims submitted after September 14, 2023. This decision is intended to prevent further improper claims and allow the agency to consult with Congress on potential legislative actions regarding the future of the ERC program. The agency is also considering reopening its Voluntary Disclosure Program, which previously expired on March 22, 2024, in order to help taxpayers rectify improperly processed claims, although the terms may be less favorable than the initial offering.
The complete release from the IRS surrounding this new phase of ERC processing can be found at: IRS enters next stage of ERC Retention Credit work; review indicates vast majority show risk of being improper.
As further guidance is issued, Schneider Downs Credits & Incentives team will continue to monitor the situation and provide updates. If you have any questions, please reach out to your Schneider Downs contact(s) or Matthew Werner.
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