by Nicholas Pantaleo
Employee Retention Credit. For some, the topic brings up a lot of skepticism, and for others, it brings a lot of joy, yet a large segment of businesses feel frustrated. If you are a business that was able to take advantage of the credit early on, you may not be aware of what is going on with the credit. For the rest of us, we have been patiently waiting for the IRS to come out with a response to the massive problem they are faced with. Before looking at current updates, let’s circle back to the problem at hand and what the IRS has done so far.
Well over 1 million outstanding claims are waiting to be processed, and thousands of claims are still coming in each week. That, in and of itself, is a large task, but when you add in the massive fraud and aggressive marketing around ERC, this quickly became nearly impossible for the IRS to tackle. They are attempting to balance avoiding paying out a bunch of fraudulent claims with finding the claims that businesses are legitimately eligible for and in need of.
Because of this issue, the IRS needed to come up with a plan to tackle this backlog. As of September 14, 2023, the IRS put a pause on all processing of new claims beyond that point. Their goal was to be able to develop a way to identify proper claims. Even though the moratorium was pausing the processing of new claims, it also severely slowed down the processing of claims still open from before that time.
Shortly after the moratorium began, the IRS also opened up the voluntary disclosure program, which allowed businesses who previously received credits to pay back 80% of the credits they received that they did not feel they were properly qualified for. This incentive to keep the 20% free of any income effects ended up being a big enough draw to work. The IRS found success with this and received 2,600 submissions to pay back credits. This program closed in March of 2024, but the IRS has hinted at making it available again due to its success, although no concrete details on that have been released.
As part of that voluntary disclosure process, they received information about firms that prepared those claims in hopes of helping guide them toward aggressive promoters. The IRS currently has many open investigations into firms and has handed down plenty of guilty sentences. They hope to continue their efforts here with the success they’ve seen so far.
Along the way, a bill was proposed and passed through the House of Representatives, which would have retroactively stopped the ERC program with a final submission date of January 31st, 2024. This ultimately died in the Senate for the time being, but there is hope to revisit it beyond the elections.
That brings us to the most recent updates. At last, the IRS has come up with a system to categorize claims as low risk, moderate risk, and higher than acceptable level of risk. Through the first take at this exercise, they are sending out 50,000 payments in September, with more to follow in the coming weeks as they continue to work through the backlog. On the opposite side of the spectrum, they are sending out 28,000 denial letters around those higher-than-acceptable levels of risk claims.
Additionally, the IRS previously had stated they wouldn’t be lifting the moratorium, but now they are going to apply the 3-tier risk categorization to claims between September 14, 2023, and January 31, 2024. They will begin with the high and low-risk categories in the same fashion they applied to all open claims before the moratorium began. The IRS only processing claims through January 31, 2024, also leads us to believe that they are holding out hope that a retroactive cutoff of ERC will still come to fruition through future legislation.
The IRS believes they have come up with a formula that holds a high level of accuracy in the denials, stating they believe denials are sent with greater than 90% accuracy in their most recent release. We have yet to see if that is true, but the small sample size of denial letters Tri-Merit has seen are all around 3rd quarter of 2021 and for clients who had qualified on a drop in gross receipts instead of a mandated shutdown. They intend to update the risk categorization based on the responses to initial denials sent out, but practitioners and businesses alike should note that an initial denial letter can be appealed if there is indeed qualification. After all, the IRS has limited information to work with in trying to determine these without further information from the client. The IRS is aware of this and ready to work on remedying qualified claims that were initially issued a denial letter.
Although this doesn’t fully open the gates to processing and lifting the moratorium, it is a great positive momentum for the IRS and businesses alike, as it should provide information about their current risk allocation. It is a win for frustrated business owners with proper claims everywhere, as they hopefully get the needed relief they applied for, in some instances, years earlier.
As we navigate the complexities surrounding the Employee Retention Credit, it is crucial to stay informed and proactive. The landscape is continuously evolving, and understanding the latest developments can significantly impact your business’s potential benefits. At Tri-Merit, we are dedicated to guiding you through this intricate process, ensuring you are equipped with the knowledge and support necessary to maximize your opportunities. If you have questions or need assistance with your ERC claims, don’t hesitate to reach out. Our team is here to provide trusted expertise and empower your business every step of the way. Together, we can tackle these challenges and turn skepticism into success.