The Employee Retention Credit (ERC) is a refundable tax credit for certain eligible businesses and tax-exempt organizations that had employees and were affected during the COVID-19 pandemic. The Small Business Association of Michigan (SBAM) selected two vendors, Occams Advisory and CLRA Group, to assist our members in determining eligibility and applying for the ERC credit. Our partner vendors have been closely monitoring communications from the IRS regarding the ERC and continue to provide us with status updates.
In September 2023, the IRS responded to an increase in false and misleading public advertisements, surge of questionable claims, and concerns from tax professionals by initiating a moratorium on processing new claims so it could digitize and review queued claims and seek input from Congress and others on an appropriate approach to the higher risk areas.
The IRS said the moratorium would last “through at least the end” of 2023. As of today, the moratorium is still in effect with seemingly no end in sight.
The IRS has entered the next stage of processing claims.
According to a June 20th IRS news release, the IRS review involved months of digitizing information and analyzing data since last September to assess a group of more than 1 million ERC claims representing more than $86 billion filed.
During this process, the IRS identified between 10% and 20% of claims that fall into what the agency has determined to be the highest-risk group, which show clear signs of being erroneous claims for the pandemic-era credit. Tens of thousands of these will be denied in the weeks ahead. This high-risk group includes filings with warning signals that clearly fall outside the guidelines established by Congress. In a July 26th news release, they announced additional warning signs of an incorrectly filed ERC return.
In addition to this highest-risk group, the IRS analysis 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, and speeding resolution of valid claims while protecting against improper payments.
At the same time, the IRS continues to be concerned about small businesses waiting on legitimate claims, and the agency says they’re 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.
The IRS anticipates some of the first payments in this group will go out later this summer. However, they emphasized these will go out at a dramatically slower pace than payments that went out during the pandemic period given the need for increased scrutiny.
When Employers Can Expect to Receive Their ERC Refund
If your company is determined to be included in the 10% to 20% of claims to be “low risk” and you filed before the September moratorium, the good news is the IRS plans to begin to pay these in the coming few weeks. The bad news is that it’s hard to say whether you are in the “low-risk” group.
The main question many small businesses have is “What metrics or data points did the IRS use in its assessment to categorize 10% to 20% of claims to be low risk?” Knowing the answer to this question would help these employers better estimate how much longer they need to wait, which affects their ability to plan their budget and ease any fear and uncertainty they’re experiencing.
The IRS also stated its assessment found 60% to 70% of claims have an “unacceptable level of risk.” That sounds scary, but before you panic, this does not mean 60% to 70% are invalid. Practically speaking, there are 60% to 70% of claims filed prior to September 14, 2023, that the IRS plans to further review.
So, the bad news is that if your claim (or claims) are in the high-risk category and you filed before September 14, 2023, when the moratorium began, it seems likely these will not be paid for quite some time. If you filed after September 14, 2023, the IRS said, “No claims submitted during the moratorium period will be processed at this time.” Unless something changes, it will probably still be a while before the IRS begins to process claims submitted post-moratorium.
Action Steps For Business Owners Stuck In The Moratorium
All employers who filed before the moratorium or are experiencing hardship can contact their respective U.S. Senators or Representatives to request a case be opened for them with Taxpayer Advocate Services. (You can find your Senator or Representative on the Congress.gov website.) The advantage of opening a case with TAS through one of your U.S. Senators or Representatives is that it gains more attention from Congress. Additionally, gaining assistance from TAS can be helpful, as it can help identify any errors and possibly improve a claim’s priority.
Small business owners have a voice and may influence Congress by sharing your story or complaint directly with one of your elected officials. Regardless of when you filed, you can request that your congressional representative take time to show their public support with a letter to the IRS Commissioner or by hosting a call with constituents who are affected.
If you are one of the SBAM members who worked through our partner vendors, Occams Advisory and CLRA Group, they can provide you with additional resources and information that may be helpful in determining the status of your claim.
SBAM will continue to share information as it becomes available through member email communications.