The IRS has finally come up for air to offer insight into its months-long “review period” of pending Employee Retention Credit (“ERC”) claims. On June 20, 2024, the agency announced that it will begin issuing payments on roughly 10 to 20 percent of claims received prior to the September 14, 2023, processing moratorium. However, 60 to 70 percent of analyzed claims contain an “unacceptable level of risk” and the remaining 10 to 20 percent have the “highest risk of being erroneous.” For these taxpayers, the decision remains whether to await further guidance or push the IRS to process their claim through the limited means available. The IRS announced that it will deny tens of thousands of the “highest risk” claims in the coming weeks, and it has already initiated 450 criminal cases potentially worth $7 billion.

Although the release did not detail the specific findings that guided the IRS risk assessments, the IRS defined low risk claims as those with no eligibility warning signs. Reading the tea leaves from prior announcements, these claims were likely made under the more objective gross receipts test rather than the more subjective government order test. For the 60 to 70 percent of taxpayers stuck in the middle, last week’s announcement means only more waiting as the IRS conducts an “additional review” of their claims. The release offered no concrete dates for this review, stating only that it will begin paying low risk claims later this summer.

Taxpayers would be wise to use this additional time to seek professional assistance in analyzing the validity of their claims. Taxpayers with well-substantiated and justified ERC claims may have the opportunity to initiate a refund suit in federal district court or the Court of Federal Claims, as several taxpayers have already done. Although the outcome of many of these cases is pending, refund litigation places some control back in the hands of taxpayers who feel they have waited too long for a response to their claims.

Anecdotally, some taxpayers have dismissed their cases after filing refund claims, presumably after some or all of their claim was processed by the IRS. However, taxpayers must consider all of the options before pursuing litigation, as their claim will be placed under a microscope. There are also significant litigation costs to consider. This leaves many taxpayers still hoping for their COVID relief funds in a significant financial predicament. 

Another option taxpayers can consider (perhaps in concert with a refund suit) is to contact the Taxpayer Advocate Services (“TAS”). The TAS is an independent organization within the IRS which assists taxpayers in the resolution of their tax matters. Although the TAS cannot issue refunds, they may be able to help move cases along, especially where the taxpayer can show that they have been uniquely harmed. While the TAS has been pushing the IRS to process claims, ERC is not the TAS’s only job.  Taxpayers should therefore ensure that they have adequate substantiating documents and a clear request for assistance when submitting their TAS request.

The IRS announced that the 10 to 20 percent of “high risk” claims will receive disallowance letters. Earlier this year the IRS detailed seven “suspicious indicators” including claims that have been filed for all available quarters, claims for which the relevant entities did not exist during the claimed period, and claims which attempt to qualify for the ERC based on general supply chain disruptions and not specific government orders (such as general guidance from the Occupational Safety and Health Administration). Taxpayers should review IRS-publicized determinants of risk in planning their next steps, as the IRS has been quite vocal about its factors-based enforcement strategy. While there is no indication of a new voluntary disclosure program, the IRS’s withdrawal program may be an option for taxpayers that find themselves in this precarious position.

Taxpayers and the IRS continue to contend with where the line should be drawn regarding the ERC. Litigation is pending in several district courts across the country challenging the current moratorium and seeking to invalidate Notice 2021-21 under the Administrative Procedure Act. Also looming in the background is the Tax Relief for American Families and Workers Act of 2024, which would impose increased penalties and disclosure requirements on ERC promoters, extend the statute of limitations on assessment, and bar additional claims filed after January 31, 2024, thus creating a hard cutoff point for the ERC.

Unfortunately, for many taxpayers with claims subject to the IRS’s “additional review,” this announcement indicates that we are still in the first Act of the ERC saga.