ERC Claims Update: What Is the IRS Doing?

The Current State of ERC Claims Processing

For many businesses, the ERC has been a vital source of financial relief. However, significant delays have left many waiting for their refunds. The IRS previously placed a moratorium on processing new ERC claims in September 2023 due to the overwhelming number of applications and concerns about fraudulent filings. This suspension continued until mid-2024, when the IRS announced it would begin processing claims again. However, the backlog remains significant, and the IRS is carefully reviewing claims to ensure compliance before issuing refunds.

Increased IRS Scrutiny and Audits

As the IRS works through the backlog, it has also ramped up its auditing efforts. Fraudulent claims have been a major concern, prompting the IRS to implement stricter scrutiny. The agency has digitized claims to analyze risk factors and identify high-risk submissions more efficiently. Businesses that submitted claims with discrepancies may face audits, and those found to have submitted fraudulent claims could face penalties, including repayment of the funds with interest.

IRS Voluntary Withdrawal and Disclosure Programs

To encourage compliance, the IRS has offered businesses options to rectify mistakes without severe penalties. A voluntary withdrawal program was launched earlier in 2024, allowing businesses to retract their ERC claims if they were uncertain about eligibility. Those who received funds but later realized they did not qualify were given an opportunity to return a portion of the money without full repayment obligations. Although this program closed in March 2024, the IRS has hinted at reopening it to provide additional relief to businesses that may have mistakenly applied for ERC.

Common Errors Leading to Claim Denials and Audits

The IRS has outlined common mistakes that have led to claim rejections or audits:

• Businesses that did not experience a significant decline in gross receipts – The ERC was designed for businesses that faced financial hardship due to the pandemic. Companies that remained operational without revenue decline may not qualify.
• Lack of evidence for government-mandated operational suspensions – Businesses must provide proof that government orders directly impacted their operations.
• Wages paid to family members – Payments made to relatives, including spouses, children, parents, and in-laws, do not qualify for ERC claims.
• Double-dipping with Paycheck Protection Program (PPP) funds – Wages used to qualify for PPP loan forgiveness cannot also be claimed under the ERC.
• Excessive claims for multiple quarters – The IRS has identified cases where businesses improperly claimed the credit for all eligible quarters, despite some showing financial recovery.

What Should Businesses Do Now?

Businesses that have applied for the ERC should take immediate steps to ensure compliance with IRS guidelines. Reviewing claims with a qualified tax professional is highly recommended to identify potential errors. If errors are found, businesses may consider amending their applications or preparing for potential IRS inquiries.

For those who have yet to apply, the window for claiming the ERC remains open for the 2021 tax year, though deadlines are approaching. Given the IRS’s increased scrutiny, applicants should take particular care to ensure they meet all qualifications before submitting a claim.

The IRS is taking significant steps to combat fraudulent ERC claims while working through a backlog of legitimate applications. Businesses should stay informed of new IRS announcements and proactively review their filings to avoid unexpected audits or penalties. If businesses find themselves struggling financially, they should explore options such as installment plans or even assess whether bankruptcy might clear tax debt.

For businesses seeking guidance, now is the time to review past filings, ensure compliance, and prepare for potential IRS inquiries. Staying proactive can help prevent unnecessary financial strain and safeguard the financial well-being of companies that rightfully qualify for the ERC.

Book a free consultation with a Guardian Tax Professional today to get clear answers to your unique situation.