Quick Hits

• The IRS has ended its moratorium on processing employee retention tax credit claims that were filed after September 14, 2023, through January 31, 2024.
• The IRS will process new claims and continue investigations of fraudulent claims and abusive tax promoters.
• Businesses can still submit amended tax returns through April 15, 2025, if they believe they are eligible for the tax credit and have not claimed it before.

On August 8, 2024, the IRS announced an end to its pause in processing new claims for the employee retention tax credit. The agency will now process claims filed between September 14, 2023, and January 31, 2024, focusing on the highest- and lowest-risk claims first.

In 2020, as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the U.S. Congress introduced the employee retention credit (ERC) for eligible businesses that were affected by a government-mandated shutdown or a significant reduction in gross receipts during the COVID-19 pandemic.

The tax credit is equal to 50 percent of qualified wages paid to eligible workers from March 13, 2020, to December 31, 2020, or 70 percent of qualified wages paid between January 1, 2021, and September 30, 2021.

During the COVID-19 pandemic, there was “misleading marketing flooding businesses to claim these credits, creating a perfect storm that added risk of improper payments for taxpayers and the government while complicating processing for the IRS and slowing claims to legitimate businesses,” said IRS Commissioner Danny Werfel. The IRS has advised taxpayers to seek the assistance of a trusted tax advisor before submitting tax credit claims or to review previously submitted tax credit claims.

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 a number of 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.

Next Steps

Businesses can expect to get a payment for the tax credit if they are eligible, or a disallowance letter if they are ineligible. Businesses’ credit claims may be subject to IRS examination before the tax credit is issued or disallowed. Businesses may exercise appeal rights in response to tax credits that are disallowed. The IRS said businesses may receive payments for some valid tax periods while the IRS continues to review other periods for tax eligibility.

Eligible employers still may be able to claim the tax credit by submitting amended tax returns to the IRS, if they haven’t already done so. Those that wish to withdraw their claim generally can do so.

The IRS said it is intensifying audits of ERC claims and pursuing civil and criminal investigations of potential fraud and abuse.

This article was co-authored by Leah J. Shepherd