In the wake of the COVID-19 pandemic, Congress passed the Employee Retention Tax Credit (ERTC) in an effort to help struggling businesses keep their employees on payroll throughout the pandemic. However, the Internal Revenue Service (IRS) has found that, in its few short years of existence, the ERTC program has been rife with fraud and […]
In the wake of the COVID-19 pandemic, Congress passed the Employee Retention Tax Credit (ERTC) in an effort to help struggling businesses keep their employees on payroll throughout the pandemic. However, the Internal Revenue Service (IRS) has found that, in its few short years of existence, the ERTC program has been rife with fraud and abuse due in large part to third-party “promoters” that have misled business owners into filing ERTC claims for which they are not eligible in order to collect a percentage of the claim as a fee — an issue that we have discussed in a prior information memorandum (https://www.bsk.com/news-events-videos/employee-retention-tax-credit-consultants-and-eligibility-traps-for-the-unwary). Unfortunately, many of these ERTC claims have been erroneously paid and the IRS has been diligently pursuing recovery of [these payouts]. To date, the IRS has recovered about $2 billion in improperly paid ERTC credits and intends to continue its efforts through new initiatives.
Most recently, in an effort to prioritize the processing of ERTC claims and deliver relief to small-business owners who have filed legitimate claims, the IRS instituted a processing moratorium on ERTC claims, effective Sept. 14, 2023, followed by a detailed review of about 1 million of its unprocessed ERTC claims, representing more than $86 billion, and, as a result of the review, has now announced plans to categorize claims into three groups and either process, deny, or conduct further review of those claims accordingly.
Specifically, in its review of the about 1 million unprocessed ERTC claims, the IRS found that, first, between 10 percent and 20 percent of the claims filed did not exhibit any eligibility warning signs and these claims are expected to be processed immediately with the first payments expected in late summer 2024. Second, the IRS found that between 60 percent and 70 percent of the claims filed showed an unacceptable level of risk — enough to not process the claim, but not enough to outright deny the claim. The IRS will be conducting an additional review of these claims before making a final determination. Finally, the IRS found that between 10 percent and 20 percent of the claims filed exhibited clear eligibility warning signs, and these claims are expected to be denied immediately.
At this point in time, business owners who have pending ERTC claims do not need to take any action and should await notification from the IRS. It is important to note that only ERTC claims filed prior to the IRS’s Sept. 14, 2023 processing moratorium will be categorized and either processed or denied at this time. Claims filed after that processing moratorium will remain in queue.
The IRS has asked for patience as it works through its ERTC claim backlog but, in the meantime, encourages business owners who have pending ERTC claims to review the ERTC guideline checklist on the IRS’s website and talk to trusted legal and tax professionals to confirm whether they are in fact eligible for the ERTC. The IRS also encourages business owners to use the special IRS withdrawal program if, after review, eligibility for the ERTC is questionable or worse. The IRS’s withdrawal program allows business owners to both request that the IRS not process an ERTC claim for any tax period that has not yet been paid and return an ERTC check that has been received but not yet cashed or deposited and withdraw the claim as though it had never been filed — both of which can avoid the imposition of penalties and interest. The IRS is also considering reopening its ERTC Voluntary Disclosure Program at a reduced rate. A decision is expected in the coming weeks.
Frank C. Mayer is a member (partner) in the Albany office of Syracuse–based Bond, Schoeneck & King PLLC. He is a business law attorney whose primary areas of practice include corporate and business law, tax planning for closely held, manufacturing and service businesses, estate planning and estate administration with a concentration in tax-related matters. Contact Mayer at fmayer@bsk.com. Jessica M. Blanchette is an associate attorney in Bond’s Albany office. Her law practice comprises corporate and business law, property law, and tax-law matters. Contact Blanchette at jblanchette@bsk.com. This article is drawn and edited from Bond’s website.
Frank C. Mayer 
Jessica M. Blanchette