Still Waiting for Your Employee Retention Tax Credit Refund? Here’s Why
Over one million ERC claims are currently pending with the IRS as processing delays and heightened scrutiny of claims have slowed disbursements.
If your business is still waiting for your Employee Retention Tax Credit (ERC) refund, you’re not alone. Over one million ERC claims are currently pending with the IRS. This refundable tax credit was designed to help businesses impacted by the COVID-19 pandemic, but processing delays and heightened scrutiny of claims have slowed disbursements. These measures, aimed at addressing fraudulent filings, have caused further delays, as the IRS ensures only eligible businesses receive refunds.
Understanding the ERC and Its Challenges
The ERC was introduced to support businesses and tax-exempt organizations impacted by pandemic-related financial losses. However, misleading marketing by some promoters led to a surge in improper claims, often promising up to $26,000 per employee—sometimes without proper eligibility checks. In response, the IRS placed a moratorium on new claims as of September 14, 2023, allowing the agency to carefully review applications and protect taxpayers from fraud.
So far, the IRS has reviewed over one million ERC claims, with potential refunds totaling $86 billion. Each claim undergoes a risk assessment, and the IRS has categorized claims into different levels of scrutiny. It is prioritizing low-risk claims (10-20% of the total). Businesses in this category may have already begun receiving refunds. However, businesses with moderate risks (60-70%) and high-risk (10-20%) claims are being asked to provide additional documentation, further delaying the process.
IRS Efforts to Address Improper Filings
The IRS has intensified its efforts to combat improper ERC filings. Since the moratorium in September 2023, the agency has processed 28,000 claims totaling $2.2 billion, while denying 14,000 claims valued at over $1 billion. To date, the IRS has recouped over $2 billion through disallowances, voluntary disclosures, and claim withdrawals.
Despite the end of the pandemic, the IRS continues to receive approximately 17,000 new ERC claims each week, fueled by aggressive marketing from third-party promoters. This has raised concerns, prompting the IRS to consult Congress on potentially extending or reforming the ERC program.
To further deter fraudulent claims, the IRS has launched criminal investigations into ERC-related fraud. Currently, there are 450 active criminal cases involving $7 billion in potential fraud, which have already resulted in 16 convictions and an average prison sentence of 25 months.
Voluntary Disclosure Program
To help businesses that mistakenly claimed the ERC, the IRS has opened a second Voluntary Disclosure Program (ERC-VDP), available until November 22, 2024. The program allows businesses to repay the ERC with a 15% reduction, without facing penalties or interest, as long as they meet eligibility requirements. This program only covers 2021 tax periods, as the 2020 program has already closed. The key features include:
- Repayment of only 85% of the ERC amount received.
- No interest or penalties if repaid before the closing agreement is signed.
- No need to amend income tax returns or worry about audits for the covered periods.
ERTC Repeal Act of 2024
The ERTC Repeal Act of 2024, introduced on September 18, 2024, is a bipartisan bill that aims to retroactively end the ERC for claims filed after January 31, 2024. Originally, the program was set to expire on April 15, 2025, but if passed, the Act would save the U.S. Treasury an estimated $79 billion by terminating the program early.
In addition to moving up the expiration date, the Act proposes to:
- Increase penalties for fraudulent claims.
- Extend the statute of limitations for audits to six years.
- Streamline the processing of low-risk claims for small businesses.
Although the bill has been introduced, it has not yet been approved by the House and Senate. Once both chambers pass it, the bill will go to the President for his signature. If signed into law, the ERC would be retroactively terminated on January 31, 2024. However, if the bill does not pass, businesses that qualify can still file for the ERC for the first three quarters of 2021 under the original expiration timeline.
This pending legislation has created uncertainty for businesses still in the process of filing claims, as it could significantly shorten the time available to apply for the credit.
What Businesses Should Do Next
Depending on your situation, here are recommended steps to take:
- If you’re waiting for a refund: No action is needed. Wait for your refund check or notification in the mail. The IRS asks that taxpayers refrain from calling about the status of their claims.
- If you received a letter requesting more information: Carefully review the letter and prepare a detailed response. You typically have 30 days to reply to the IRS.
- If your claim was denied: Take immediate action to preserve your appeal rights. These letters generally have a 30-day limit for appeals. Consult your tax advisor to determine the best course of action.
- If you received an ERC refund but are unsure about your eligibility: The second Voluntary Disclosure Program is open until November 22, 2024, allowing you to correct any mistaken claims.
Conclusion
While the IRS is making progress on ERC claims, businesses should expect continued delays as the agency deals with a large volume of applications and improper filings. The recent introduction of the ERTC Repeal Act of 2024 adds further complexity, potentially accelerating the end of the program and reducing the window for claims. With over $86 billion in potential refunds at stake, the IRS is working diligently to ensure compliance, focusing on prioritizing low-risk claims while scrutinizing those that may be improper. For businesses still waiting on refunds or navigating recent legislative changes, it’s important to stay informed and respond promptly to any IRS requests for additional information.
Guest columnist Raj Shah is the founder and president of UVS VAT and Property Tax America LLC., companies that help businesses with VAT recovery, property tax appeals, ERC claims, and more. Business Insights is hosted by the Law Firm of KPPB Law (www.kppblaw.com). Sonjui L. Kumar is a founding partner of KPPB Law, practicing in the area of corporate law and governance. Disclaimer: This article is for general information purposes only and does not constitute legal, tax, or other professional advice.
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