After a nearly year-long pause to address its issues with processing employee retention credit (ERC) claims, the IRS has begun processing some claims filed after Sept. 14, 2023. The IRS also plans to begin the payment process for 50,000 claims in September. However, the IRS isn’t lifting its moratorium on the processing of new ERC claims. Instead, the agency is “shifting” the moratorium period to allow for the processing of claims filed between Sept. 14, 2023, and Jan. 31, 2024.

The IRS will focus its attention on claims at the highest and lowest risk of being incorrect when it begins processing its next batch of claims. As a result, the IRS will begin taking actions on claims from that time period where the agency has sound reasons for either paying or denying the claim.

In addition to beginning payment on claims for the first time since the moratorium was implemented, the IRS is continuing to take action against taxpayers who submitted improper or incorrect ERC claims. In recent weeks, the agency sent out 28,000 disallowance letters to businesses whose claims showed a high risk of being incorrect. The disallowances will prevent an estimated $5 billion in improper ERC payments. The IRS is also undertaking thousands of audits related to ERC claims and has initiated 460 criminal cases related to improper claims.

For those taxpayers who submitted improper or incorrect ERC claims and have already received refunds, the IRS has reopened its ERC voluntary disclosure program. Taxpayers with improper claims that have not been processed may still withdraw their ERC claim.

A new stage of ERC processing

To counter the flood of erroneous ERC claims the agency was receiving following aggressive marketing campaigns targeting ineligible taxpayers, the IRS imposed a moratorium on processing claims submitted after Sept. 14, 2023. The moratorium gave the IRS time to digitize the information on a group of ERC claims it was studying. The information needed to be digitized because ERC claims were paper filed.

The IRS’s analysis of the digitized claims helped inform the next steps it planned on taking by providing information to improve the accuracy of ERC claims processing going forward. This detailed review allowed the IRS to move into a new stage of the program where it will be issuing more taxpayer payments and disallowances. The agency said it will continue working with tax professionals to help them navigate the complex process on behalf of their clients.

Appealing denied claims

Businesses that have had their ERC claim denied by the IRS can file an administrative appeal with the agency or file a federal court claim. Administrative appeals are filed by responding to the address listed on the denial letter within the stated time period, usually 30 days from the date of the letter. Additional information on filing an administrative appeal is available on the IRS’s website.

Some recent denial letters inadvertently omitted the paragraph highlighting the process for filing an appeal to the IRS or federal court, and the agency is taking steps to ensure that a letter explaining the correct process is mailed to all relevant taxpayers. Regardless of the language in the notice, those taxpayers who’ve had their ERC claims denied are entitled to an administrative appeal.

IRS says few claims denied by mistake

The agency said it is aware of the concerns tax practitioners have raised concerning potential IRS errors when denying properly filed ERC claims and plans on working with taxpayers to correct any mistakes. The agency is evaluating the results of its first significant wave of disallowances in 2024 and determined that errors are relatively rare and that more than 90% of disallowance notices were validly issued.

The IRS is continuing to monitor the feedback it is receiving from the tax community regarding invalid claims and will make any adjustments necessary to minimize the burden on businesses and their representatives. Specifically, the agency will be adjusting its process and filters for determining whether ERC claims are invalid following each wave of disallowances.

IRS continuing compliance work

The IRS is continuing its analysis of ERC claims, increasing the number of audits and pursuing promoter and criminal investigations. In addition to the latest wave of disallowance letters, the IRS has pursued other initiatives, which have generated the following results:

• ERC claim withdrawal program is ongoing, and has led to more than 7,300 entities withdrawing $677 million in claims
• First ERC voluntary disclosure program ended in March (it recently reopened) and the IRS received more than 2,600 applications from ERC recipients disclosing $1.09 billion in credits
• Criminal Investigations unit has initiated criminal cases related to potentially fraudulent claims totaling nearly $7 billion. So far, 37 investigations have resulted in federal charges, with 17 resulting in convictions and nine defendants have been sentenced to an average of 20 months in prison
• IRS’s Office of Promoter Investigations has received hundreds of referrals related to suspected abusive tax promoters and preparers improperly marketing the ERC to ineligible taxpayers. The IRS is continuing to gather information and will continue its civil and criminal enforcement efforts with regard to these unscrupulous promoters and preparers

While the ERC voluntary disclosure program closed in March, the IRS said it is planning to reopen the program and will soon be releasing additional details.