The Employee Retention Credit (ERC) was introduced as a relief measure to help businesses retain employees during the COVID-19 pandemic. However, the program faced numerous challenges, including a high volume of claims and widespread improper filings. These issues prompted the IRS to implement a processing moratorium in September 2023.
Since that time, the IRS has engaged in a comprehensive review to determine how to handle the ERC claims made prior to the moratorium. Their latest news release outlines their approach to handling the backlog of claims.
Review and identification of high-risk claims
During the review, the IRS categorized the claims into three risk levels: high-risk, "unacceptable level of risk," and low-risk, each requiring a different handling approach.
The analysis revealed that 10% to 20% of the claims are classified as high-risk, showing clear signs of error. These high-risk claims will be denied in the upcoming weeks.
Enhanced scrutiny of medium-risk claims
The IRS has also identified a significant portion of claims, estimated between 60% and 70%, showing an unacceptable risk level. These claims will undergo additional scrutiny to improve the agency's compliance review. As a result, the majority of claims will be subject to this extended review process, which may lead to delays in processing and notifications.
Low-risk claims: processing and payment timeline
The IRS recognizes that many small businesses are still waiting on legitimate ERC claims. Approximately 10-20% of these claims are considered low-risk, showing no signs of ineligibility.
The IRS will begin processing these low-risk claims, with the first payments expected to be disbursed later this summer. Priority will be given to the oldest claims, and the IRS will adjust any claims with calculation errors before payment.
The IRS has emphasized that no claims submitted during the moratorium period will be processed at this time.
Continued availability of the ERC withdrawal program
The IRS continues to promote the special ERC Withdrawal Program, especially in light of the large number of questionable claims revealed by the recent review. If you submitted an ERC claim in the past but believe you were ineligible for the credit, you can withdraw your claim if it has not been processed yet or if you haven't cashed or deposited any ERC checks received. The IRS will treat the claim as though it was never filed, with no interest or penalties applied.
Compliance and advisory measures
The IRS cautions taxpayers who filed ERC claims that the process will take time. If you believe you have a legitimate claim, you do not need to take any action at this point and should wait for further notification from the IRS. The agency also advises against calling IRS toll-free lines, as additional information on these claims is generally not available while processing continues.
With that said, the ERC Withdrawal Program remains a viable option for those who suspect they may have submitted an ineligible claim. The IRS continues to urge taxpayers with pending claims to review the ERC guideline checklist and consult a trusted tax professional to review eligibility requirements.