TIGTA says IRS should review $42 billion in ERC claims

In its attempt to speed processing of employee retention credit (ERC) claims, the IRS changed its policy for pre-refund examinations and should consider reviewing nearly 185,000 claims totaling almost $42 billion, the Treasury Inspector General for Tax Administration (TIGTA) said in a recent report (TIGTA Rep’t No. 2024-400-068 (Sept. 30, 2024)).

TIGTA estimated that the change, which covered tax years 2020 and 2021, resulted in payment of $2 billion in erroneous ERC claims.

The IRS said the changes were made “to deal with the influx of ERC claims and to expedite the processing of ERC claims,” according to the report, dated Sept. 30 and published Oct. 2. However, the changes meant that 184,923 returns claiming $41.8 billion in the ERC were not considered for possible pre-refund examination, TIGTA said.

The first change, in January 2022, doubled the referral threshold. The second, in November 2022, changed the referral criteria to include only returns that met specific return scenarios, TIGTA said.

The IRS partially agreed with the recommendation, saying it will review the claims for potentially erroneous payments under the recapture program.

However, the IRS said it does not agree that the claims “included potentially erroneous ERC paid simply because the returns did not meet the referral criteria. The IRS will consider additional post-refund compliance actions to recover potentially erroneous or excessive ERC paid after assessing competing priorities, available resources, and time remaining on the statute of limitations.”

ERC background

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 when they 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.

Other TIGTA findings

The IRS reported it updated three identity theft filters, allowing it to identify over 155,000 tax returns claiming potentially erroneous employee retention credits and preventing $487 million in refunds from being issued during processing years 2021 through 2023. But the IRS did not apply the updated filters to tax returns screened using the old filters, the report said. TIGTA found 997 returns reporting $19.6 million in potentially erroneous ERC claims through July 20, 2023, that the IRS did not identify. The IRS said it had previously identified 525 of these cases and would analyze the remaining 472.  

TIGTA also found an additional 923 employers that made ERC claims totaling $105 million and that should have received a disallowance letter, but the IRS did not initially identify them. The IRS said it had previously identified those employers and identified them as “high-risk/unprocessable” and said it would issue disallowance letters to them.  

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