Employee Retention Credit (ERC) Tax Program Resumes Processing Claims

An IRS program designed to give businesses struggling in the wake of the COVID-19 pandemic has resumed processing applications following a temporary moratorium caused by a flood of fraudulent petitions to the tax bureau.

At this point, it’s trite to say that 2020 changed things; between supply chain interruptions, the rise of remote work, and the cultural metamorphosis that occurred during that tumultuous year—to name just a few factors—the impact of the coronavirus breakout is undeniable.

Across statutory and international boundaries, professionals in every industry are still reeling from its aftershocks, and the United States Internal Revenue Service (IRS) is no exception.

What is the ERC tax credit program?

The Employee Retention Credit (ERC) tax program of the IRS was established to help small businesses weather the economic challenges caused by the COVID-19 pandemic.

The ERC program was established under the Coronavirus Aid, Relief, and Economic Security (CARES) Act to provide financial relief to businesses that retained employees during the initial years of the pandemic. It allows eligible employers to claim a refundable tax credit based on wages paid to employees.

While this program provided a critical boon for many struggling businesses, it also led to some problems. Besides the risk of disallowance for the program due to its complexity and the current tax landscape, there has been an above-average number of improper claims caused by aggressive, sometimes “predatory” marketing by “promoter groups,” according to the IRS.

It has proven to be exceptionally complex, with thousands of businesses attempting to claim it—many of whom did so improperly, causing bureaucratic bottlenecks.

“The Employee Retention Credit is one of the most complex tax provisions ever administered by the IRS, and the agency continues working hard to balance our work to protect taxpayers from improper claims while also making payments to qualifying businesses,” said Danny Werfel, commissioner of the IRS. “It has been a time-consuming process to separate valid claims from invalid ones.”

Why did the IRS put a moratorium on new applications for the ERC program?

Since the program was implemented, numerous bad actors have attempted to exploit it through aggressive marketing tactics and misinformation, convincing businesses to submit claims even if they are ineligible. The IRS has made identifying and preventing fraud-related activity in the ERC tax credit program a top priority.

Due to a flood of applications—many of which were improperly filed, if not explicitly fraudulent—the IRS placed a moratorium on claims submitted after September 14, 2023, to give the agency time to digitize and analyze them.

In August 2024, the IRS announced that it would begin processing claims filed for the ERC program between September 14, 2023, and January 31, 2024.

How is the IRS addressing improper ERC tax credit applications?

The agency has enhanced its auditing and criminal investigation procedures to address the high volume of questionable ERC applications.

The IRS recently sent out 28,000 disallowance letters; although tax professionals raised concerns about the legitimacy of these notices, the agency has stated for the record that approximately 90% of them were “validly issued” and that errors related to rejected ERC applications were “isolated.”

Nonetheless, the high number of erroneous or fraudulent applications has caused IRS auditors and fraud specialists to scrutinize ERC applications more closely. The agency is also collaborating with the Department of Justice to pursue criminal investigations against those promoting or benefiting from fraudulent ERC claims, as well as ramping up its monitoring efforts to detect and prevent improper claims moving forward. This includes a combination of data analytics, audits, and close coordination with state and federal agencies to identify patterns of abuse.

As of August 2024, the IRS had begun processing approximately 50,000 new, “low-risk” claims, striving to deliver much-needed financial support to eligible businesses.

The agency has also stated that it will continue to work with the tax professional community to make adjustments to “minimize burdens on small businesses and their representatives.”

Next steps

Businesses that have claimed the ERC should expect follow-up communications from the IRS, especially if their claims fall into categories that have been flagged for further investigation.

It's also critical for businesses involved with ERC tax credit program to keep thorough documentation of their payroll records, including proof of employee retention and the impact of COVID-19 on their operations.

The IRS has also urged businesses to review their records carefully and work with qualified tax professionals to ensure compliance with the rules of the ERC program.

For more information, visit the IRS newsroom.