Late last month, the IRS provided an update on the processing of Employee Retention Credit (ERC) claims. In the update, the agency plans to deny tens of thousands of “high-risk” ERC claims while starting a new round of processing “low-risk” claims. 

IRS Commissioner Danny Werfel said in the release: “The completion of this review provided the IRS with new insight into risky Employee Retention Credit activity and confirmed widespread concerns about a large number of improper claims. 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 has identified between 10% and 20% of claims fall into what the agency has determined to be the highest-risk category, showing clear signs of being erroneous claims for the pandemic-era credit. This high-risk group includes filings with warning signals that clearly fall outside the guidelines established by Congress.

Additionally, the IRS also estimates between 60% and 70% of the claims show an unacceptable level of risk. For this category of claims with risk indicators, the IRS will be conducting additional analysis to gather more information with a goal of improving the agency’s compliance review, speeding resolution of valid claims while preventing improper payments.

For taxpayers who made a questionable claim, there is a claim withdrawal process available.  Many of these taxpayers may have been misled by promoters who incorrectly indicated the business qualified for the ERC. Evidence of the widespread fraud related to ERC is reflected in the IRS announcing over $2 billion in compliance efforts.

On a positive note, the IRS is concerned about small businesses waiting on legitimate claims, and the agency is taking more action to help. Between 10% and 20% of the ERC claims show a low risk. For those with no eligibility warning signs that were received prior to last fall’s moratorium, the IRS will begin judiciously processing more of these claims.

For clients awaiting approval of their ERC claims, the IRS indicates that no further action should be taken. Frustratingly, they ask taxpayers to await further notification from the IRS. Cray Kaiser will keep you apprised of further ERC developments.