The IRS and the Employee Retention Credit: Navigating Turbulent Waters
Since its introduction, the Employee Retention Credit (ERC) has been a source of significant frustration for both the IRS and employers. Initially designed to provide financial relief to businesses during the COVID-19 pandemic, the ERC has been plagued by administrative delays, a surge in dubious claims, and a complex application process. These issues have led to a backlog of unprocessed claims and a series of lawsuits from employers seeking their entitled refunds.
The Growing Backlog and Legal Battles
The IRS's slow processing times have been a major point of contention. Employers with valid claims have been left waiting for extended periods, while the IRS tries to sort through the influx of potentially fraudulent claims. This delay has resulted in legal actions from frustrated businesses. For instance, a California employer filed a lawsuit against the IRS on December 1, 2023, alleging that its ERC guidance violated the Administrative Procedure Act. Similarly, a Texas employer sued the IRS on January 12, 2024, after waiting nearly two years for an ERC refund.
More recently, an Arizona company, Stenson Tamaddon, LLC, challenged the IRS's moratorium on processing ERC claims submitted on or after September 14, 2023. The company sought a preliminary injunction to halt the moratorium, highlighting the significant procedural hurdles and prolonged wait times faced by legitimate claimants.
IRS Response and Challenges
In response to the ongoing litigation and criticism, IRS officials have highlighted the challenges they face. IRS Deputy Commissioner Douglas O'Donnell noted the various obstacles the agency has encountered in processing ERC claims, including the need to weed out high-risk and fraudulent submissions. The IRS has embarked on a detailed review process to identify and deny tens of thousands of improper claims while slowly beginning to process lower-risk claims.
IRS Commissioner Danny Werfel acknowledged the complexity of the ERC program and urged taxpayers for patience as the agency works through the backlog. The IRS's review process involved digitizing over 1 million ERC claims and analyzing them for compliance. This review found that between 10% and 20% of claims were clearly improper, while an additional 60% to 70% of claims required further scrutiny due to potential risk indicators.
A Slow Path Forward
Despite these efforts, the pace of ERC claim processing remains slow. The IRS has committed to starting payments for low-risk claims later this summer, but the overall speed will be much slower than during the pandemic due to increased scrutiny. The agency continues to emphasize that taxpayers with pending claims need not take any additional action and should await further notification.
The IRS's ongoing compliance efforts have led to the disallowance of over $2 billion in claims through various programs, including the Voluntary Disclosure Program and the ERC Withdrawal Program. The agency has also initiated numerous audits and criminal investigations to combat fraudulent claims. However, the sheer volume of pending claims, estimated at around 1.5 million, means that many businesses will continue to wait for their refunds.
The Path Forward for Taxpayers
Taxpayers with pending ERC claims have limited options. While contacting the IRS or the Taxpayer Advocate Service (TAS) may provide some assistance, these avenues are often slow and cumbersome. Engaging a trusted tax advisor to assess the claim and potentially consider filing a refund claim in court may be a more effective strategy for some businesses. However, this approach comes with increased scrutiny and legal costs.
The IRS is likely to continue a measured approach, issuing some refunds, auditing claims, and denying others, but the overall resolution of the backlog will take time. Businesses should be prepared for a prolonged process and consider all available options to navigate the complexities of the ERC program.
In conclusion, while the IRS works to address the issues surrounding the ERC, businesses with legitimate claims will need to remain patient and proactive in seeking their refunds. The ongoing legal battles and administrative challenges highlight the need for a balanced approach that ensures compliance while providing timely relief to eligible businesses.
