Article Highlights:
- IRS's Current Position on ERC Claims
- High-Risk Claims
- Medium-Risk Claims
- Low-Risk Claims
- Availability of a Voluntary Withdrawal Program
- Businesses with Unprocessed Claims
- Businesses with Uncased Refund Checks
- Businesses with Concerns About Claim Validity
- How to Withdraw an ERC Claim
The Employee Retention Credit (ERC) was created in 2020 as part of the Corona virus Aid, Relief, and Economic Security (CARES) Act to assist businesses in keeping employees on payroll during the COVID-19 epidemic. The loan was created to offer financial relief to enterprises who faced large income decreases or were forced to cease operations owing to government orders. However, the ERC's intricacy and aggressive marketing by some proponents have resulted in a considerable number of erroneous claims filed.
The IRS has been diligently working to identify and address these improper claims. A recent review revealed that a significant portion of the claims submitted show a high risk of being improper, so the IRS has announced new measures to ensure compliance and protect taxpayers.
IRS's Current Position on ERC Claims - In a recent announcement (IR-2024-169), the IRS outlined its plans to deny tens of thousands of high-risk ERC claims while resuming the processing of low-risk claims. This decision comes after months of digitizing information and analyzing data to assess the validity of over 1 million ERC claims, representing more than $86 billion.
- High-Risk Claims - The IRS has identified that between 10% and 20% of the ERC claims fall into the highest risk category. These claims exhibit clear signs of being erroneous, or even fraudulent in some cases, and fall outside the eligibility guidelines established by Congress. The IRS will be denying these high-risk claims in the coming weeks. This group includes filings with warning signals such as:
- Claims that significantly deviate from the established eligibility criteria.
- Claims submitted by businesses that do not meet the revenue decline or suspension of operations requirements.
- Claims that appear to be inflated or fraudulent.
- Medium-Risk Claims - In addition to the high-risk claims, the IRS estimates that between 60% and 70% of the claims show an unacceptable level of risk. These claims will undergo additional analysis to gather more information and improve the agency's compliance review. The goal is to speed up the resolution of valid claims while protecting against improper payments. Taxpayers with claims in this category may experience delays as the IRS conducts further investigations.
- Low-Risk Claims - Approximately 10% to 20% of the ERC claims are considered low-risk, showing no eligibility warning signs. The IRS will prioritize the processing of these claims to ensure that eligible taxpayers receive their refunds promptly. Businesses with low-risk claims can expect to see their refunds processed in the coming months, provided there are no additional issues identified during the review.
In general, the IRS will work on the oldest claims first; however, no claims received after September 14, 2023, when the IRS's claim processing embargo began, will be processed at this time. The IRS has highlighted that firms with outstanding ERC claims should not call the service's toll-free lines since information on the status of claim processing is not available over the phone.
Availability of a Voluntary Withdrawal Program- The IRS has also established a special ERC Withdrawal Program to assist firms that may have filed incorrect claims. This service lets taxpayers to voluntarily remove their ERC claims, preventing future compliance difficulties and fines. The withdrawal method is especially advantageous for people who were coerced or mislead by ERC marketers or promoters into making illegitimate claims. Who should consider withdrawing?
- Businesses with Unprocessed Claims - If your ERC claim has not yet been processed by the IRS, you can use the withdrawal program to request that the IRS not process your claim. This will prevent any future compliance issues and potential penalties.
- Businesses with Uncased Refund Checks - If you have received an ERC refund check but have not yet cashed or deposited it, you can still withdraw your claim. The IRS will regard the claim as though it was never submitted, and no interest or penalties will apply.
- Businesses with Concerns About Claim Validity - If you are worried about the legitimacy of your ERC claim and fear it may not fulfill the eligibility standards, you may explore the withdrawal program, which can assist you avoid IRS audits and compliance measures.
How to Withdraw an ERC Claim:
To take advantage of the claim withdrawal procedure, follow the special instructions provided by the IRS at https://www.irs.gov/newsroom/withdraw-an-employee-retention-credit-erc-claimHere is a summary of the steps:
- Consult with Your Payroll Company: If your professional payroll company filed your ERC claim, consult with them. Depending on how the claim was filed, the payroll company may need to submit the withdrawal request on your behalf.
- Submit a Withdrawal Request: If you filed your ERC claim yourself and have not received, cashed, or deposited a refund check, you can fax your withdrawal request to the IRS using a computer or mobile device. The IRS has set up a special fax line to receive these requests, enabling the agency to stop processing before the refund is approved.
- Mail the Withdrawal Request: If you are unable to fax your withdrawal request, you can mail it to the IRS. However, this method will take longer for the IRS to receive and process.
- Respond to Audit Notices: If you have been notified that your ERC claim is under audit, you can send the withdrawal request to the assigned examiner or respond to the audit notice if no examiner has been assigned.
- Return Uncased Refund Checks: If you have received a refund check but have not cashed or deposited it, you can still withdraw your claim. Mail the voided check along with your withdrawal request using the instructions provided by the IRS.
The IRS's recent decision to refuse high-risk ERC claims and reprocess low-risk claims is part of a larger effort to assure compliance and safeguard taxpayers. Businesses who have submitted ERC claims should carefully assess their eligibility and explore the voluntary withdrawal program if they have any doubts about the legitimacy of their claims.
It is strongly recommended that all firms take care and seek expert advice when dealing with ERC claims. The ERC's intricacy, combined with certain proponents' aggressive marketing practices, has resulted in a large number of false claims. Businesses can prevent potential audits, fines, and other compliance measures by adopting proactive activities such as withdrawing problematic claims and adhering to IRS requirements.
If you have any questions or need assistance with your ERC claim, please do not hesitate to contact our office. We are here to help you navigate this complex process and ensure that your business remains in compliance with IRS requirements.