On January 8, 2025, National Taxpayer Advocate Erin M. Collins released her 2024 Annual Report to Congress, finding overall improvement in the IRS taxpayer service but also highlighting persistent challenges, particularly delays in processing Employee Retention Credit (ERC) claims.
At the onset of the COVID-19 pandemic, Congress enacted the Employee Retention Credit (“ERC”) to support struggling businesses and exempt organizations impacted by government-imposed restrictions by providing a tax credit intended to keep employees on the payroll. Instead, for many taxpayers, ERC has become a source of confusion and hardship due to lengthy delays, inefficient processing times, limited guidance and communication, unclear notices, and non-standard examination processes. The IRS’s understaffing and missteps have prolonged businesses’ hardships leaving many without the funds they need to stay afloat, pay employees, or plan for the future.
The IRS implemented a processing moratorium in September 2023 citing rampant fraud in ERC claims and detailing the necessity to pause processing to determine better ways to detect fraud. Prior to the moratorium, the IRS had processed approximately 3.6 million ERC claims. Since the implementation of the moratorium, the number of claims processed has dropped juristically and came to a near standstill for almost 12 months. On October 10, 2024, the IRS announced that it had 400,000 claims processed or “ready-to-process” that taxpayers had filed prior to January 31, 2024. Of those 400,000 claims, 28,000 claims were disallowed and 50,000 were valid claims the IRS had previously announced it was processing.
As of October 26, 2024, about 1.2 million claims remained unprocessed, and it is unclear as to when taxpayers can expect the IRS to act on their claims. Many of these claims have been pending for more than a year – resulting in financial hardship for businesses. Figure 1, below, illustrates the fluctuation in processing by the IRS of ERC claims over the past several years.
Figure 1. Fluctuation of Processed ERC Claims
On December 13, 2024 at the ABA Tax Section’s Criminal Tax Fraud and Tax Controversy Conference in Las Vegas, IRS Commissioner Danny Werfel announced that the IRS had plans to process around 500,000 ERC claims by the end of 2024, since the IRS has “a better sense of where the ineligible claims are going to be.” Werfel also announced that another 500,000 – 600,000 claims were “teed up” for approval in 2025; however, details and timing of the refunds are still to be determined. Furthermore, Werfel acknowledged that in Summer 2024, the IRS relied on algorithms to deny 20,000 ERC claims which inaccurately disallowed 10%-20% of valid claims. Since then, the IRS has tweaked its algorithms based on practitioner feedback, but given that the IRS is relying on algorithmic processing, it is likely to use broad eligibility criteria that may still reject valid claims during 2025.
Next Steps for Taxpayers
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, but that speeds should increase from those in 2024. Additionally, the IRS has cautioned taxpayers that calling the IRS toll-free lines will not be fruitful because additional information regarding claims 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 complete release from National Taxpayer Advocate Erin M. Collins can be found at:
National Taxpayer Advocate Annual Report to Congress 2024 (taxpayeradvocate.irs.gov)
As further guidance is issued, our 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 at [email protected].
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