The Internal Revenue Service announced recently that it will resume processing refunds for the Employee Retention Credit. This tax incentive was offered to help businesses retain employees during the time of COVID-19. After an almost year-long hiatus in the processing of ERC claims, the IRS announced it will restart processing certain ERC refunds for thousands of hard-hit Americans. This article covers, in detail, the announcement, the timeline for expected refunds, and what to know moving forward for businesses.
Background on the Employee Retention Credit
The CARES Act provided for an Employee Retention Credit as a financial lifeline for businesses affected by the pandemic-related shutdown in March 2020. Under this credit, eligible employers could get a refundable tax credit against certain employment taxes to help them in continuing their operation and thus retaining their staff during a taut moment in the economy. The program, however, has been under close scrutiny because of fraudulent claims and improper filings that are rampant; this prompted the IRS to issue a moratorium on the processing of new claims back in September 2023.
Throughout the period of the moratorium, the IRS did a great job of revisiting their processes to better identify legitimate claims and ensure fraud does not slip through. This included the mailing of countless denial letters to businesses with questionable claims amounting to billions of dollars of improper payouts.
Key highlights with the re-initiation of processing ERC claims
The IRS stated that they would resume the processing of such claims that the IRC has evaluated as low-risk for fraud on August 8, 2024. The IRS segregated around 50,000 ERC valid claims which are to be processed in the first lot. All these claims are a part of the re-initiation process while keeping guard against fraudulent filings.
The IRS will focus on claims filed within the September 14, 2023–January 31, 2024 window. Those businesses whose claims have been processed within this window will start to process claims by September 2024, with additional payouts in the weeks and months following.
Timeline for refunds
While the IRS indicated that processing for these low-risk claims will begin in September, the time frame for the refunds is anything but certain. The IRS has cautioned that processing speeds won’t return to pre-moratorium levels right away, and businesses should expect delays. It is still working through a significant backlog of claims and will process them based on the risk assessed for each claim.
Businesses with ERC claims in place should be keenly attentive to the progress their applications are making. The Internal Revenue Service is going to weed out those applications that are riskier and those that are less risky, leaving those of medium risk to wait even longer. Currently, 17,000 claims are received each week by the IRS, and this value foreshadows a long time ahead before clearing the huge workload.
Denials and appeals
In addition to processing meritorious claims, it has dispatched almost 28,000 denial letters to businesses whose claims are improper. The denials are part of the IRS’s efforts to head off up to $5 billion in erroneous payouts. A business that is denied is allowed to appeal—even if the denial letter doesn’t spell out the appeals process. Taxpayers usually have 30 days from the date of the denial letter to file an appeal.
For those who feel their claims were wrongly denied, it is best to respond directly at the address in the denial letter and follow filing procedures for an administrative appeal by guidelines on the IRS website.
A path forward for businesses
Although this news from the IRS regarding the reopening of processing of ERC claims is clearly a benefit for so many businesses waiting anxiously for their refunds, complexities like audits and possible denials within the ERC program mean businesses should be vigilant and proactive with regard to their claims.
With increased scrutiny on the part of the IRS, which is currently keying on minimal-risk claims and heightening controls to stop fraudulent activities, this could be in for a long haul. Staying current on claims status and knowing how the appeal process works will become a requirement of businesses navigating this landscape. Continuing to fine-tune the IRS processes, more updates and guidance can be expected in the months ahead for businesses.
