The Employee Retention Credit (ERC) is a fully refundable payroll tax credit designed to assist employers affected by the COVID-19 pandemic. It can provide a significant refund for eligible employers. In September 2023, the IRS announced a moratorium on processing (not receiving) new ERC claims while it scrutinized the validity of the large number of unprocessed claims in its inventory. The IRS is concerned that third-party promoters used aggressive tactics to convince organizations to claim the credit without properly assessing the organization’s eligibility.

The IRS has concluded its review and issued 28,000 letters to organizations denying their ERC claims. These letters typically require some form of response within 30 days of issuance. Accordingly, if your organization receives one of these letters (IRS Letter 105C, Claim Disallowed) you should act swiftly to respond and preserve your right to appeal. 

In addition to issuing disallowance letters, the IRS also announced that it is preparing to initiate payments on a first group of 50,000 ERC claims it has identified as valid. Payment of additional valid claims will follow.

The IRS also said that it will now start judiciously processing ERC claims filed between September 14, 2023, and January 31, 2024.

Further, as part of its continued scrutiny of ERC claims, the IRS has released five new warning signs of incorrect claims. This is in addition to seven warning signs the IRS previously issued. 

The five new warning signs cover these areas: 

  • Essential businesses during the pandemic that could fully operate and didn’t have a decline in gross receipts.
  • Organizations unable to support how a government order fully or partially suspended their business operations.
  • Organizations reporting family members’ wages as qualified wages.
  • Organizations using wages already used for Paycheck Protection Program (PPP) loan forgiveness.
  • Large employers claiming wages for employees who provided services.

The agency is urging organizations that have pending ERC claims or that are considering filing for the claim to review their eligibility and check that their claims do not include any of the 12 warning signs or other errors. You can learn more about each of the 12 warning signs in this IRS news release. 

The IRS noted that many of the errors it is seeing reflect bad advice coming from [ERC] promoters. Organizations that believe their claims include these warning signs should consult with a trusted tax professional and consider using the ERC Withdrawal Program. Organizations that file an ERC claim that the IRS determines to be illegitimate must repay the entire credit, along with interest and possibly penalties. This can be costly. 

In June 2024, the IRS said it believes that between 10% to 20% of ERC claims are in the highest-risk group for being an erroneous ERC claim, 60% to 70% are considered to have an unacceptable level of risk, and 10% to 20% are considered low-risk.

The IRS also noted that in the coming days it plans to issue information about an expected short-term reopening of the ERC Voluntary Disclosure Program, which closed on March 22, 2024.

Additional ERC resources, including articles and answers to frequently asked questions, are available on the CapinCrouse website. These resources are designed to assist organizations in any stage of the ERC process. If your organization receives a disallowance letter, CapinCrouse can also help you file an appeal. You can contact the firm here to learn more.