Employee Retention Tax Credit (ERTC) Claims Under Scrutiny: Key IRS Developments Explained

The IRS has recently ramped up its scrutiny of Employee Retention Tax Credit (ERTC) claims, issuing several significant updates that could affect your business. These developments highlight the importance of ensuring your ERTC claims are accurate and compliant with the law. Here’s what you need to know.

IRS Cracks Down on Erroneous ERTC Claims

On June 20, 2024, the IRS announced its intent to deny tens of thousands of ERTC claims that were flagged as potentially erroneous. According to the IRS, these claims contain “warning signals that clearly fall outside the guidelines established by Congress.” The IRS estimates that 10%-20% of the claims it reviewed are at high risk of being incorrect and will be denied in the coming weeks if they haven't been already.

In addition to these high-risk claims, another 60%-70% of claims were identified as posing an unacceptable level of risk. The IRS plans to conduct further analysis on these claims to expedite the resolution of valid ones while preventing improper payments. The remaining 10%-20% of claims, which are considered low-risk, should see payments issued later this summer.

Moratorium on ERTC Claims Processing

Following its announcement of a claims-processing moratorium in September 2023, the IRS stated that it would halt processing any claims submitted after that date until further notice. However, on August 8, 2024, the IRS revealed that it will now start processing claims filed between September 14, 2023, and January 31, 2024. The IRS will focus first on claims it deems either high or low risk, aiming to quickly pay out or deny these claims.

Businesses with pending claims are advised not to call the IRS for updates, as additional information is typically unavailable. The IRS also suggested that businesses that believe they may have submitted improper claims should consider using the IRS’s withdrawal process to avoid potential interest and penalties.

New Warning Signs of Incorrect ERTC Claims

On July 26, 2024, the IRS identified five new warning signs that could indicate incorrect ERTC claims:

1. Essential businesses during the pandemic that could operate fully and didn’t experience a decline in gross receipts.

2. Businesses unable to support how a government order fully or partially suspended operations.

3. Reporting family members’ wages as qualified wages.

4. Using wages already used for Paycheck Protection Program (PPP) loan forgiveness.

5. Large employers claiming wages for employees who provided services.

These new warning signs add to the seven previously announced by the IRS, including claims for too many quarters, citing government orders that don’t qualify, and claiming ERTC for businesses that didn’t pay wages or didn’t exist during the eligibility period.

IRS Voluntary Disclosure Program May Reopen

The IRS is in the final stages of reopening its ERC Voluntary Disclosure Program, which closed in March 2024. This program allowed businesses to return 80% of their ERC refunds without interest, among other terms. However, any reopened program is expected to have less favorable terms, so businesses should carefully consider their options.

What to Do If Your ERTC Claim Is Denied

If your ERTC claim is denied, you have the option to appeal the decision through the IRS Independent Office of Appeals. An appeal should be filed within 30 days of the notice denying the claim. Additionally, you may sue for your refund, but this must be done within two years of the notice denying your claim.

Given these developments, it’s crucial to ensure that your ERTC claims are accurate and that you have the necessary documentation to support them. If you’re uncertain about the status of your claim or need assistance navigating these complex issues, contact your trusted tax professional for guidance.

If you need further help with your ERTC claims or have any questions, don't hesitate to reach out to us. We’re here to help you navigate these challenging times and ensure your business remains compliant with the latest IRS regulations.