IRS Announces Denial of High-Risk Employee Retention Credit Claims

21 June 2024

WASHINGTON--

In a recent move to safeguard taxpayers and small businesses, the Internal Revenue Service (IRS) has announced plans to deny tens of thousands of high-risk Employee Retention Credit (ERC) claims. Additionally, the IRS will initiate the processing of lower-risk claims to assist eligible taxpayers. 

Commissioner Danny Werfel highlighted the complexity of the ERC program and the need for a meticulous review to prevent improper payouts and expedite legitimate claims. The review process, which started in September, involved digitizing and analyzing data from over 1 million ERC claims totaling more than $86 billion. 

High-Risk Claims 

The IRS identified that 10% to 20% of these claims fall into the highest-risk category, showing clear signs of being erroneous. These claims will be denied in the coming weeks. Additionally, 60% to 70% of claims are deemed to have an unacceptable level of risk and will undergo further analysis to improve compliance reviews and resolve valid claims while preventing improper payments. 

Low-Risk Claims 

To support small businesses with legitimate claims, the IRS will start processing the 10% to 20% of claims that show low risk and no eligibility warning signs. Payments for these claims are expected to begin later this summer but will proceed at a slower pace due to the need for increased scrutiny. 

Moratorium and Future Actions 

Claims submitted during the moratorium period will not be processed at this time. The IRS will maintain this moratorium and consult with Congress and other stakeholders on the future of the ERC program. This includes potential legislative actions and possibly extending the statute of limitations to allow more time for pursuing improper claims. 

Special IRS Withdrawal Program 

Given the high number of questionable claims, the IRS encourages businesses with unprocessed claims to consider using the special IRS ERC Withdrawal Program. This program allows businesses to withdraw their claims to avoid future compliance issues without penalties or interest. 

Compliance Efforts and Enforcement 

The IRS’s compliance efforts around erroneous ERC claims have now topped $2 billion since last fall. This includes disallowances, the special ERC Voluntary Disclosure Program, and the claim withdrawal process. The IRS is also considering reopening the Voluntary Disclosure Program at a reduced rate to help taxpayers with previously processed claims avoid future compliance actions. 

Ongoing Investigations 

The IRS continues to investigate criminal activities related to potentially fraudulent ERC claims, with 450 cases initiated and significant enforcement actions taken. Thousands of ERC claims are currently under audit, and promoter investigations are underway to identify abusive tax promoters and preparers. 

Guidance and Resources 

The IRS urges businesses to review ERC eligibility requirements carefully and consult trusted tax professionals. Resources available on IRS.gov include: 

• ERC Eligibility Checklist: An interactive tool and printable guide. 

• 7 warning signs ERC claims may be incorrect: Information on tactics used by unscrupulous promoters. 

• FAQs: Detailed answers about ERC eligibility rules, definitions, and examples. 

By taking these actions, the IRS aims to protect taxpayers from improper claims and ensure that eligible businesses receive the support they deserve. 

For more information, please contact a member of our  Tax Team.

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