IRS Advances to Next Phase of (ERC) Employee Retention Credit Review; Majority of Claims Believed Risky

by | Jun 24, 2024

ARTICLE | June 24, 2024

The Internal Revenue Service (IRS) has announced (IR-2024-169) its progression to the next stage of reviewing the Employee Retention Credit (ERC), with preliminary findings indicating that a large percentage of credit claims could be improper. This news comes as the IRS continues its efforts to ensure that the provisions and benefits of the CARES Act are used correctly.

Established under the CARES Act, the ERC was designed to help businesses keep their employees on payroll during the COVID-19 pandemic. This refundable payroll tax credit can be lucrative to an eligible employer whose business was financially impacted by COVID-19.

The IRS has been working to identify and prevent potential errors and fraud in the ERC, with its efforts so far involving the use of technology and advanced data analytics. The agency has also been focusing on educating employers about the requirements and qualifications for the credit to prevent misuse.

As the IRS moves into the next phase, the agency's primary focus will be on reviewing claims that have been made and ensuring that the credit has been correctly claimed. This phase will involve the use of automated and manual reviews, and may also include audits where necessary.

In their preliminary review, the IRS found that a significant number of businesses could be at risk of improperly claiming the credit. The agency identified more than 30,000 businesses that may have claimed more than $2.7 billion in ERC erroneously. The vast majority of these cases seem to involve a misunderstanding of the eligibility rules, rather than intentional fraud. The IRS has emphasized that this is a preliminary estimate, subject to change as the review continues.

In response to these findings, the IRS has sent out soft letters to businesses, providing information about potential errors and how to correct them. These letters are not audits, but rather a tool to educate and guide businesses in understanding and complying with the ERC rules. The agency is also encouraging businesses to review their claims and correct any errors voluntarily.

The IRS has reminded businesses of the importance of understanding the eligibility requirements for the ERC and encouraged businesses to utilize a trusted tax professional for guidance regarding ERC claims. These requirements include having a significant decline in gross receipts or a full or partial suspension of operations due to governmental orders related to COVID-19. Businesses that received Paycheck Protection Program (PPP) loans are not eligible to claim the credit for the same wages.

In closing, the IRS has underscored its commitment to ensuring that the ERC is used correctly. The agency will continue its efforts to educate businesses about the credit's requirements, while also identifying and addressing potential errors and misuse. The IRS's next stage of review is a vital step in these ongoing efforts, aiming to ensure the integrity of the ERC and its role in supporting businesses during the pandemic.

Reach out to one of our experts for any assistance with the ERC.

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