The IRS Resumes Processing Employee Retention Credits

The IRS has ended its moratorium on processing ERC claims. The IRS announced on August 8, 2024, that it will begin processing claims filed after September 14, 2023, through January 31, 2024. The agency will process the highest and lowest risk claims first. The IRS placed a moratorium on processing ERC claims submitted after September 14, 2023, to give the agency time to digitize information on a large study group of ERC claims. The IRS said the analysis helped the agency determine its next steps to improve claims processing accuracy. The IRS sent 28,000 disallowance letters in recent weeks to businesses whose claims showed a high risk of being incorrect, and the agency estimated that more than 90 percent of those letters were validly issued. The IRS acknowledged that some of the recent mailings inadvertently omitted a paragraph highlighting the process for filing an appeal to the IRS or district court, and it is taking steps to ensure this language is sent to all relevant taxpayers.While the IRS is still evaluating the results of this first significant wave of disallowances in 2024, early indications indicate errors are isolated, the IRS said.The IRS identified several red flags that indicate a business does not qualify for the tax credit. These include being an essential business that could fully operate and didn't have a decline in gross receipts, being unable to show how a government order fully or partially suspended business operations, reporting family members wages as qualified wages, using wages already used for Paycheck Protection Program loan forgiveness, and large employers claiming wages for employees who provided services during the pandemic.
 

What to Expect: Businesses that applied for ERC can expect to receive the full credit if they receive approval. The IRS said businesses may receive payments for some valid tax periods while the IRS continues to review other periods for tax eligibility. Additionally, ERC claims can be subject to audit or examination before the credit is approved or disallowed. The IRS said it is intensifying audits of ERC claims and pursuing civil and criminal investigations of potential fraud and abuse. If a business receives a disallowance letter, the business may exercise appeal rights to the IRS for the amount of the disallowed credit or bring suit in district court.

For any further questions about the Employee Retention Credit, please contact Grady McMichen or your Pease Bell Tax Advisor.