The ERC was created to support businesses and exempt organizations impacted by the COVID-19 pandemic in 2020 and 2021 but has experienced significant administrative struggles due to complexity and perceived fraud. Key findings include:
A bulk of IRS troubles revolve around the volume of claims submitted and complexity of the ERC. Additionally, the program quickly became a target of fraud. Pop-up promoters inundated the market, often pushing aggressive eligibility arguments that the IRS attempted to combat in communications and guidance. However, some argue the IRS estimation that a majority of more recent claims are fraudulent is an overstatement and that many valid claims are incorrectly being denied or challenged.
To combat perceived fraud, the IRS imposed a lengthy processing moratorium in September of 2023, which lasted nearly a year and remains in place for claims submitted after January 31, 2024. The IRS has not yet caught up on its processing backlog, as claims continued to be submitted during the moratorium. TAS reported that nearly 1.2 million ERC claims remain unprocessed as of October 26, 2024. Many businesses awaiting ERC funds are in turn experiencing financial hardships or have been forced to close.
Wait times for ERC claim processing are currently averaging over a year from submission date—381 days to be exact. A common taxpayer complaint is that there is little to no communication by the IRS with respect to claims submitted, which is concerning as processing times and backlogs continue to grow. It’s possible to call the IRS or review transcripts for a status update, but often information is limited to whether a claim has been received and if it’s in process. Generally, no timeframe is provided regarding when a claim will be reviewed or paid. TAS reported that the IRS has “no intention of providing regular, real-time updates to taxpayers regarding their claims.”
When the IRS does communicate with ERC applicants, it’s sometimes in a confusing and incorrect denial letter. Documented notice issues include 28,000 letters sent to businesses during the summer of 2024 that omitted required appeals language and lacked adequate explanation or resolution for a rejection.
IRS data analytics were incorrect on many occasions as well, denying valid claims for reasons such as inaccurate IRS-calculated employee counts, maximum credit computations, and decline in gross receipts. Often the notices also have short turnaround times and do not follow standard review or audit procedures, adding pressure to an already confusing situation.
Taxpayers may also be surprised to learn that receiving an ERC refund may not be where the story ends, as the IRS can claw back refunds they deem erroneous after payout. On August 15, 2024, the IRS announced it would send 30,000 new letters to reverse potentially more than $1 billion in what they deem to be improper ERC claims.
ERC processing delays are also causing issues related to the associated income tax return amendment. While the ERC is claimed as a payroll tax credit, the law requires an income tax return adjustment to remove a wage deduction for the corresponding amount of ERC claimed. For example, an ERC claimed for a 2020 quarter reduces 2020 wage expense for income tax purposes.
The wage expense reduction generally results in additional tax due, which would theoretically be paid for with timely received ERC refunds. But with lengthy processing delays and limited time to file an amended income tax return, a business may not have cash to pay tax due without the ERC refund. As such, the IRS has put taxpayers in a tough position regarding the timing of filing required amended income tax returns.
If the income tax return is adjusted in anticipation of an ERC refund and the claim is denied, taxpayers may be out of statute to reverse the wage reduction on an amended return. The reverse is true as well. If taxpayers wait too long to adjust an income tax return and an ERC claim is ultimately paid, they will be out of statute to pay tax due on the wage expense reduction.
Potential fixes for this timing and cashflow mismatch were previously introduced in proposed legislation that has not yet been enacted. Another remedy could be through IRS administration, whereby the required adjustment to wage expense would be allowed in the year ERC is actually processed. These options require action by either Congress or the IRS.
The ERC can be a significant lifeline for businesses impacted by the pandemic but has proven to be a source of frustration instead for many. Businesses awaiting refunds or who receive IRS notices related to ERC may want to reach out for support.
Published: 01/24/2025
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