The IRS's long-awaited recommencement of employee retention credit claim processing is welcome news to qualifying small businesses across the US that have been waiting for the agency to process their properly prepared outstanding claims and issue refund checks.
Nevertheless, there remains a considerable backlog of ERC claims, with the National Taxpayer Advocate estimating 1.4 million unprocessed claims as of June 26 in its midyear report to Congress.
The IRS announced Aug. 8 that businesses with ERC claims filed between Sept. 14, 2023, and Jan. 31, 2024, would begin seeing payments or denials. The agency offered insight into its short-term priorities, with plans to issue payments this month for 50,000 claims identified as low-risk, along with another large block of low-risk claims later this year.
Taxpayers may have various options for their underlying ERC claim, depending on their specific situation—most significantly the newly reopened ERC voluntary disclosure program. Taxpayers should review their claim regardless of where they are in the ERC process. Those who haven't yet filed still have time to take advantage of the potentially tremendous benefits the ERC offers to small businesses.
The IRS has cautioned taxpayers that ERC processing speeds will be slower now due to more deliberate and methodical reviews of claims to prevent future fraud and other abuses. For taxpayers with pending ERC claims, no further action is necessary, and they should simply await IRS notification.
It's critical for taxpayers to remain vigilant against improperly issued denial letters. In cases where ERC claims can be substantiated and proven to have been improperly denied, the agency has said it would work with taxpayers to get it right. Denied taxpayers also can file an administrative appeal with the IRS Independent Office of Appeals or file refund litigation in the appropriate district court.
The agency is also intensifying its ERC audits both in frequency and scope, and pursuing civil and criminal investigations for potential fraud and other abuses. For taxpayers who are uncertain about the validity of an ERC claim, the potential penalties justify a detailed review of the claim. To that end, the IRS is offering remedial measures for those that find their underlying ERC claim was filed improperly.
For taxpayers who self-identify that they wrongly received ERC funds, acceptance into the second iteration of the voluntary disclosure program allows them to repay 85% of the amount they wrongly received (keeping the remaining 15% as nontaxable income), without incurring penalties or interest. They also won't be required to amend income tax returns to make the corresponding adjusting reduction in wage expense.
Taxpayers who are confident they were eligible to claim the ERC but are uncertain about the amount claimed can file an amended IRS Form 941-X to reflect the accurate amount. Reviewing ERC claims that were prepared and filed by potentially unqualified third parties may uncover that the taxpayer's prior claim wasn't maximized under IRS guidelines, and the taxpayer could be eligible to claim additional amounts.
Unless Congress passes a bill to sunset the ERC early, taxpayers can file their claims based on employee wages paid during tax year 2021 until April 15, 2025. For qualifying eligible employers who maintained employees on payroll during the Covid-19 global pandemic, the ERC still represents an excellent opportunity for businesses that find themselves cash-poor and are seeking to increase liquidity.
Originally published by Bloomberg Tax
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