IRS Maintains ERC Moratorium Despite Pressure
The Internal Revenue Service (IRS) has announced it will continue its moratorium on processing new Employee Retention Credit (ERC) claims, citing concerns over potential fraud and improper claims. This decision comes despite mounting pressure from various stakeholders to lift the suspension and one lawsuit currently pending in Arizona District Court.
Key Points for Tax Preparers:
- Ongoing Backlog: The IRS currently faces a backlog of 1.4 million ERC claims, with new submissions arriving at a rate of 17,000 per week.
- Fraud Concerns: IRS Commissioner Daniel Werfel revealed that a recent analysis of digitized data from over 1 million claims indicates 60-70% present an "unacceptable level of risk."
- Claim Categories:
- 10-20% fall into a "highest risk" group, showing clear signs of abuse.
- 60-70% require further analysis due to high risk.
- 10-20% are considered low risk and may be processed soon.
- Processing Plans: The IRS intends to deny high-risk claims while beginning to process low-risk claims received before the moratorium. Initial payments for legitimate claims are expected later this summer.
- Compliance Efforts: Since last fall, the IRS has:
- Recouped over $2 billion through various compliance initiatives.
- Processed 28,000 claims worth $2.2 billion.
- Disallowed more than 14,000 claims totaling over $1 billion.
- Received withdrawals from 4,800 entities, amounting to $531 million.
- Recovered $1.09 billion through the voluntary disclosure program.
- Legislative Action: The IRS is advocating for the passage of ERC-specific provisions in the Tax Relief for American Families and Workers Act of 2024 (H.R. 7024) before lifting the moratorium. The legislation primarily would prevent the aggressive and abusive marketing tactics that led to so many inappropriate claims in the first place.
- Potential Program Reopening: The IRS is considering reopening the voluntary disclosure program at a reduced rate, with more information expected in the coming weeks.
Implications for Clients:
- Extended Wait Times: Clients with pending ERC claims should anticipate continued delays in processing.
- Increased Scrutiny: The IRS's focus on high-risk claims suggests that all applications will face rigorous examination.
- Potential Audits: Clients should be prepared for the possibility of audits, especially if their claims fall into higher-risk categories.
- Withdrawal Option: The withdrawal process remains open for clients who may have submitted erroneous claims.
- Future Disclosure Opportunity: Clients who missed the initial voluntary disclosure program may have another chance if the IRS reopens it at a reduced rate.
- Legislative Developments: Keep clients informed about the progress of H.R. 7024, as its passage could impact the processing of ERC claims.
Professionals should continue to have conversations with clients about making improper or high risk claims and ensure that expectations of long wait times are set. Emphasize the importance of maintaining accurate documentation to support ERC claims and recommend a thorough review of previously submitted applications to ensure compliance. Proactive communication with clients about these developments will help manage expectations and mitigate potential issues arising from the ongoing moratorium and increased scrutiny of ERC claims. Tax pros should keep an eye out for more information coming from the IRS in the coming weeks to help provide clients with more detailed information.
Christine Gervais
Christine Gervais is a licensed CPA, using her skills to help businesses grow and achieve their fullest potential. Christine has a Master’s degree in accounting from Southern New Hampshire University in addition to holding her CPA license for over a decade. Notably, Christine is a nationally recognized speaker providing education to other CPAs on how to best serve clients as well as instruction on a wide variety of topics for business owners on how to maximize success. Christine prides herself on the value she can bring to clients with her extensive tax knowledge and provides strategic, forward-thinking financial strategies to help clients grow. When not behind her desk, you can find Christine spending quality time with her daughter and stepson or tending to the family’s excessively loved farm animals.
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