IRS: Review of 1 million ERC claims reveals most show signs of risk

By Martha Waggoner, Journal of Accountancy

Most remaining employee retention credit (ERC) claims show signs of fraud or errors, and the IRS will deny tens of thousands of the most obvious erroneous claims in the coming weeks, the Service said Thursday.

The IRS also will start a new round of processing claims with the lowest risk of fraud while maintaining a moratorium on reviewing more recent claims, according to a news release.

A review of 1 million ERC claims "provided the IRS with new insight into risky employee retention credit activity and confirmed widespread concerns about a large number of improper claims," IRS Commissioner Danny Werfel said in the release. "We will now use this information to deny billions of dollars in clearly improper claims and begin additional work to issue payments to help taxpayers without any red flags on their claims."

The IRS digitized and analyzed over 1 million ERC claims since Sept. 14, 2023, when the moratorium began, the IRS said. Those claims represent over $86 billion, the IRS said.

The ERC was designed to help certain businesses continue paying employees during the COVID-19 pandemic while their operations were either fully or partially suspended due to a government order or had a significant decline in gross receipts during the eligibility periods. It was generally available to eligible businesses from March 31, 2020, to Sept. 30, 2021, and to Dec. 31, 2021, for recovery startup businesses.

How the ERC claims stack up

• Between 10% and 20% of the claims reviewed so far are in the highest risk group, meaning they show clear signs of errors and will be denied in the weeks ahead, the IRS said.
• The IRS will gather more information about between 60% and 70% of the claims because they show an unacceptable level of risk.
• Between 10% and 20% of the claims show a low risk. The IRS "will begin judiciously processing" more of these claims, and, according to the release, expects some of these payments to be made later this summer.

The IRS said it will work on processing the oldest claims first; no claims submitted during the moratorium will be processed at this time.

Since the moratorium was put in place, the IRS said, it has received over 17,000 claims per week.

In other updates, the IRS said it is assessing whether to reopen its voluntary disclosure program, which ended in March. Under the program, businesses that received ERC funds through Dec. 21, 2023, could arrange to repay the incorrect ERC, less a 20% discount, for any tax period they were not eligible for the credit. If it does reopen the voluntary disclosure program, the terms likely will be less favorable. The IRS's ERC claim withdrawal process remains open for taxpayers who may have submitted an improper claim that has not yet been processed.

Compliance efforts around erroneous ERC claims have now topped over $2 billion since last fall, the IRS said.

Also, the IRS plans to seek congressional help with the ERC program, including possibly shutting down new claims and seeking an extension of the statute of limitation so that the agency has more time to pursue improper claims.

"The whole world has changed involving employee retention credits since the deepest days of the pandemic," Werfel said. "Anyone applying for this credit needs to talk to a trusted tax professional and closely review the eligibility requirements, not someone playing fast and loose and trying to make a fast buck off well-meaning taxpayers. People need to be cautious of promoters trying to take advantage of today's announcement to drive more business."