By Chris Purnell, Partner and Tax Counsel, CapinCrouse LLP
The IRS has issued several important updates about the Employee Retention Credit (ERC), a fully refundable payroll tax credit designed to assist employers affected by the COVID-19 pandemic.
ERC Disallowance Letters Issued and Processing Moratorium Lifted
In September 2023, the IRS announced a moratorium on processing (not receiving) new ERC claims while it scrutinized the validity of the large number of unprocessed claims in its inventory. The IRS is concerned that third-party promoters used aggressive tactics to convince organizations to claim the credit without properly assessing the organization’s eligibility.
The IRS has concluded its review and issued 28,000 letters to organizations denying their ERC claims. These letters typically require some form of response within 30 days of issuance. Accordingly, if your organization receives one of these letters (IRS Letter 105C, “Claim Disallowed”) you should act swiftly to respond and preserve your right to appeal.
In addition to issuing disallowance letters, the IRS announced that it is preparing to initiate payments on a first group of 50,000 ERC claims it has identified as valid. Payment of additional valid claims will follow.
The IRS also said that it will now “start judiciously processing” ERC claims filed between September 14, 2023, and January 31, 2024.
Additional Warning Signs of Incorrect ERC Claims
As part of its continued scrutiny of ERC claims, the IRS also released five new warning signs of incorrect claims. This is in addition to seven warning signs the IRS previously issued.
The five new warning signs cover these areas:
- Essential businesses during the pandemic that could fully operate and didn’t have a decline in gross receipts.
- Organizations unable to support how a government order fully or partially suspended their business operations.
- Organizations reporting family members’ wages as qualified wages.
- Organizations using wages already used for Paycheck Protection Program (PPP) loan forgiveness.
- Large employers claiming wages for employees who provided services.
The agency is urging organizations that have pending ERC claims or that are considering filing for the claim to review their eligibility and check that their claims do not include any of the 12 warning signs or other errors. You can learn more about each of the 12 warning signs in this IRS news release.
The IRS noted that many of the errors it is seeing “reflect bad advice coming from [ERC] promoters.” Organizations that file an ERC claim that the IRS determines to be illegitimate must repay the entire credit, along with interest and possibly penalties. This can be costly.
In June 2024, the IRS said it believes that between 10% to 20% of ERC claims are in the “highest-risk” group for being an erroneous ERC claim, 60% to 70% are considered to have an “unacceptable” level of risk, and 10% to 20% are considered “low-risk.”
Voluntary Disclosure Program Reopened
In addition, on August 15, 2024, the IRS announced that it has reopened its ERC Voluntary Disclosure Program for organizations that want to repay the funds they received after filing ERC claims in error.
Organizations must apply by November 22, 2024. Those that the IRS accepts into the program will be able to repay ERC funds received for tax periods in 2021 at a 15% discount and avoid future audits, penalties, and interest. The program cannot be used to disclose and repay ERC funds from tax periods in 2020.
Note that the terms of the new program are different from the first Voluntary Disclosure Program, which was open from December 22, 2023, to March 22, 2024. That program provided a 20% discount on repayment of erroneous claims.
The IRS also said it plans to send up to 30,000 new letters to reverse or recapture potentially $1 billion or more in erroneous ERC claims. If your organization filed an ERC claim and you are now wondering if it was accurate, we recommend working with a trusted tax professional to determine or confirm eligibility so you can decide whether to apply for the new disclosure program.
You can learn more about who qualifies for the second ERC Voluntary Disclosure Program and how to apply here. The IRS also provides additional details on the Employee Retention Credit – Voluntary Disclosure Program page of its website and in these FAQs.
In addition, the IRS’s claim withdrawal program is still available to organizations whose ERC claims haven’t been paid yet. More information about the withdrawal program is available here.
More ERC resources, including articles and answers to frequently asked questions, are available on the CapinCrouse website. These resources are designed to assist organizations in any stage of the ERC process. CapinCrouse can assist you with questions about the ERC Voluntary Disclosure Program or the withdrawal process, or if you receive a disallowance letter and would like help filing an appeal. You can contact the firm here to learn more.
About the Author
Chris Purnell serves as Partner and Tax Counsel at CapinCrouse LLP, a national CPA and consulting firm exclusively serving churches and other nonprofit organizations. A licensed attorney, Chris advises exempt organizations of all sizes on a wide range of issues, including tax and employee benefit-related matters, representation before state and federal tax authorities, and assistance with firm audit or advisory engagements to formulate advice and counsel on important operating and tax issues. Chris also assists clients with general tax issues, unrelated business income, charitable solicitation, and missionary employment structures. Prior to joining CapinCrouse in 2019, Chris served as the Executive Director of the Neighborhood Christian Legal Clinic, the nation’s largest Christian legal aid organization. He can be reached at cpurnell@capincrouse.com.