ERC disallowance letters go to 28K businesses, moratorium adjusted

The IRS will start processing some employee retention credit (ERC) claims that have been subject to its claim processing moratorium, it announced on Thursday. The Service also said it has recently sent out 28,000 disallowance letters to businesses and plans to begin paying 50,000 valid claims for the pandemic-era credit.

“These claims span multiple tax law changes, multiple calendar year quarters, and have differing payment amounts,” IRS Commissioner Danny Werfel said Thursday during a call with reporters. “These have to be worked individually, claim by claim, and they all come in on paper, adding even further to the complexity of sorting valid claims from invalid ones. During the past year, we maintained a slow, judicious cadence of ERC approvals, but we are now taking important steps forward to intensify our pace and begin reducing the overall inventory of pending ERC claims.”

Moratorium

To counter the flood of claims resulting from the work of ERC promoters, the IRS announced last fall a moratorium on processing claims submitted after Sept. 14, 2023, to give the agency time to digitize information on the large study group of ERC claims.

It will now process claims filed between Sept. 14, 2023, and Jan. 31, 2024, Werfel said.

“As members of Congress have noted, the program worked as intended during the crisis period, but then aggressive promoters moved in last year,” Werfel said “Promoters intensified their marketing, bombarding the airwaves with ads and aggressive marketing. You couldn’t turn on the TV or radio without coming across an ERC ad.”

The moratorium stopped much of that marketing, he said.

“The moratorium has been, without a doubt, a success,” Werfel said. “It slowed the number of claims coming in. The marketing on TV and radio dropped dramatically. It gave us time to focus on our compliance work, and, importantly, it gave us time to analyze the massive inventory of ERC claims that came in.”

The date of Jan. 31, 2024, is not a coincidence, Werfel said. It conforms with a proposed bar on additional ERC claims under The Tax Relief for American Families and Workers Act of 2024, H.R. 7024, which passed the House but failed in the Senate. The deadline under the current law is April 25, 2025.

The new moratorium cutoff “preserves that date, should the legislation go through,” Werfel said, and “would not overcomplicate matters if we were to issue payments post-Jan. 31 at this time.”

The IRS continues to receive an average of 17,000 ERC claims weekly, he said.

Background on the ERC

The ERC was designed to help certain businesses continue paying employees during the COVID-19 pandemic while their operations were either fully or partially suspended due to a government order or had a significant decline in gross receipts during the eligibility periods. It was generally available to eligible businesses from March 31, 2020, to Sept. 30, 2021, and to Dec. 31, 2021, for recovery startup businesses.

Disallowance letters

The IRS estimates that the 28,000 ERC disallowance letters will forestall up to $5 billion in improper payments. The disallowances were sent to businesses with claims that showed a high risk of being incorrect. The Service also announced that it is performing thousands of ERC audits and that it has opened 460 criminal cases. Tax professionals have raised concerns about potential errors in these letters; however, the IRS believes over 90% of the notices were valid, Werfel said.

“The concerns flagged, which we are currently looking into, impact less than 10% of the disallowance letters sent,” Werfel said. “We are closely watching this, and it’s important to keep in mind there was a wide range of businesses and claims that came in due to the heavy marketing. It’s a big sea of claims from a diverse set of taxpayers. Given that, it’s not surprising, given the complexity of this credit, that there are some questions. That’s why we’re not rushing to push out large volumes of these denials immediately. This is uncharted territory for the IRS, and we are navigating the landscape carefully.”

Businesses that receive a denial of an ERC claim can file an administrative appeal with the IRS Independent Office of Appeals.

Low-risk claims will be paid

The IRS has identified 50,000 valid ERC claims and said it expects payments to begin going out in September. The agency expects to add another large block of additional low-risk claims for processing and payment in the fall.

ERC compliance work

Beyond the disallowance letters, current compliance initiative results include:

• Claim withdrawal program: The IRS says the claim withdrawal process for unprocessed ERC claims has led more than 7,300 entities to withdraw $677 million in claims.
• Voluntary disclosure program: During the program, which ended in March, the IRS received over 2,600 applications from ERC recipients that disclosed $1.09 billion worth of credits.
• Promoter investigations: The IRS said it is gathering information about suspected abusive tax promoters and preparers who are improperly promoting the ability to claim the ERC. The IRS’s Office of Promoter Investigations has received hundreds of referrals from internal and external sources. The IRS will continue civil and criminal enforcement efforts.

AICPA advocacy

The AICPA Tax Section created this ERC resources page to help members understand the credit and the IRS claims processing process.

— To comment on this article or to suggest an idea for another article, contact Martha Waggoner at Martha.Waggoner@aicpa-cima.com.