On August 8, after much hand-wringing and a light tongue-lashing from former Internal Revenue Service commissioner Chuck Rettig, the IRS announced they’d be making some progress on the many Employee Retention Credit (ERC) claims sitting in a self-imposed backlog. ERC was one of many COVID-19 relief measures hastily issued by the government in early 2020 to encourage employers to keep people on the payroll through lockdown-related business disruptions.
That IRS press release, for your reading pleasure:
IRS moves forward with Employee Retention Credit claims: Agency accelerates work on complex credit as more payments move into processing; vigilance, monitoring continues on potentially improper claims
The ERC program began as an effort to help businesses during the pandemic, but as time went on the program increasingly became the target of aggressive marketing – and potentially predatory in some cases – well after the pandemic ended. Some promoter groups called the credit by another name, such as a grant, business stimulus payment, government relief or other names besides ERC or the Employee Retention Tax Credit (ERTC).
To counter the flood of claims, the IRS announced last fall a moratorium on processing claims submitted after Sept. 14, 2023, to give the agency time to digitize information on the large study group of ERC claims, which are made on amended paper tax returns. The subsequent analysis of the results during this period helped the IRS evaluate next steps, providing the agency valuable information to improve the accuracy of ERC claims processing going forward.
The detailed review during the moratorium allowed the IRS to move into this new stage of the program with more payments and disallowances. In addition, the IRS will remain in close contact with the tax professional community to help navigate through the complex landscape.
While this might be good news for the few business owners who’ve been waiting a long time for their legitimate ERC claims to go through, apparently some senators weren’t so happy to hear this.
U.S. Senators Mitt Romney (R-UT), Thom Tillis (R-NC), and Joe Manchin (I-WV) said on September 19 they’ve introduced the Employee Retention Tax Credit Repeal Act, bipartisan legislation that would disallow the processing of Employee Retention Tax Credit (ERTC) claims filed after January 31, 2024 and increase penalties on fraud.
In the IRS’ own words, ERC has been rife with fraud and abuse, hence the moratorium they placed on processing of new ERC claims last year. Employee Retention Credits made the yearly Dirty Dozen list of tax scams two years in a row.
Said the senators in their news release:
The ERTC has been highly susceptible to fraudulent schemes—costing taxpayers nearly 200% more than anticipated and adding an estimated $230 billion to the national debt through Fiscal Year 2023. By eliminating the ERTC, the senators’ bill would save taxpayers an estimated $79 billion over 10 years.
“In a rare moment of widespread agreement in Washington, almost all members of Congress agree that we should eliminate the ERTC—which has been pervaded by fraud and cost nearly 200% more than originally projected,” said Senator Romney. “Stealing from the government is stealing from hardworking taxpayers. Instead of repurposing ERTC funds for future spending programs, we should eliminate this plagued credit now to lower our national debt.”
“Repealing the ERTC is a critical step towards addressing America’s debt crisis,” said Senator Tillis. “It’s past time to eliminate this fraud-ridden pandemic-era policy so we can concentrate on getting our fiscal house in order.”
Estimates suggest the ERC credit has added $230 billion to the deficit through FY2023 and could eventually cost up to $550 billion.
“Congress established the ERTC during the onset of the COVID-19 pandemic to encourage businesses to retain employees during such unprecedented circumstances. As President Biden formally ended the COVID-19 Public Health Emergency in May 2023, it’s time for the IRS to move on, too. I’m proud to join the bipartisan ERTC Repeal Act, which would end the ERTC for claims submitted after January 31, 2024—cutting down on the staggering and unexpected costs of this program—and would enhance anti-fraud measures for claims still being processed,” said Senator Manchin.
Over the summer, the IRS The IRS spent months digitizing information and analyzing data for more than one million ERC backlogged claims, the total of which was more than $86 billion. Through this analysis, the agency determined 10-20% of claims were low-risk, 60-70% of claims had unacceptable risk, and 10-20% had high risk. Meaning only about 10-20% of these million ERC claims were most likely legitimate and met the requirements to claim the credit.
As of August, he IRS has sent out 28,000 disallowance letters to businesses whose claims showed a high risk of being incorrect, disallowances that will prevent up to $5 billion in improper payments according to IRS estimates. Thousands of audits are underway, and 460 criminal cases have been initiated. The IRS has moved 50,000 low-risk ERC claims into the pipeline for payment processing in coming weeks.
Text of the Employee Retention Tax Credit Repeal Act can be found here [PDF].
Romney, Tillis, Manchin Introduce Bipartisan Legislation to Repeal COVID-Era Tax Credit Riddled with Fraud [Senator Mitt Romney]