IRS Processing 400,000 Pandemic-Era Business Credit Claims, Eligible Filings Valued at $10 Billion

IRS Commissioner Daniel Werfel testifies before the House Ways and Means Committee on Capitol Hill on Feb. 15, 2024. Chip Somodevilla/Getty Images

The IRS is accelerating work on processing a pandemic-era credit program for businesses while weeding out ineligible claims.

Approximately 400,000 Employee Retention Credit (ERC) applications are being analyzed, which includes both “eligible and ineligible claims, with the vast majority in this tranche being processed for approval,” the agency said in an Oct. 10 statement. “The total value of eligible claims represents about $10 billion. Checks are being mailed for eligible claims with refunds, with more planned in the weeks and months ahead.”

ERC was instituted during the COVID-19 pandemic and offered a refundable tax credit for businesses that paid employees when they shut down as a result of lockdowns and other restrictions. However, the program was increasingly manipulated by scammers who mischaracterized eligibility rules and pushed business owners to claim ERC even when they were not eligible.

In March, the agency stated that it had uncovered and prevented $1 billion in fraudulent or incorrect ERC applications over the previous six months. The IRS was also looking into an additional $3 billion in potentially bad claims.

IRS Commissioner Danny Werfel said the agency is “working diligently” to quickly process ERC filings while guarding against improper payments.

The tax agency has made “substantial progress” in separating the eligible from the ineligible applications and is continually refining its models to identify more improper claims, according to Werfel.

“The IRS understands the vital importance of Employee Retention Credits payments for struggling small businesses, and we are continuing to make important progress on one of the most complex tax administration provisions we’ve ever had,” he said.

Last month, the agency announced opening a consolidated claim process aimed at helping third-party payers (TPP) and their clients resolve issues related to incorrect ERC filings.

“Third-party payers report and pay clients’ federal employment taxes under the third-party payer’s Employer Identification Number. They handle clients’ payroll and tax reporting duties,” the agency stated.

“Some of these TPPs filed ERC claims for multiple employers. If a third-party payer’s client has since determined it is ineligible for the ERC and wants to resolve their claim, it is the third-party payer that needs to correct it.”

While the IRS says it is diligently working to process ERC claims, a late September report from the Treasury Inspector General for Tax Administration (TIGTA) found some issues with the agency’s handling of the claims.

The report pointed out that the IRS experienced delays in processing ERC claims.

“IRS did not begin processing ERC claims for 12 months, due to a lack of updated programming and procedural guidance,” it reads.

And when the agency did begin tackling them between March 2021 and April 2021, it had to work through a backlog of claims filed through paper forms that required manual processing.

“Delays in processing ERC claims may impact legitimate businesses that are eligible for the ERC and could result in increased interest paid by the IRS to these businesses, if a determination is made that the ERC claim is legitimate,” TIGTA stated.

An analysis of 1.9 million claims processed by the IRS between Jan. 6, 2022, and June 29, 2023, suggested that the tax agency may have allowed $19.5 billion in ERC claims while leaving these filings “unreviewed,” according to the report.

Voluntary Disclosure

In December 2023, the IRS announced a voluntary disclosure program (VDP) that enabled employers who filed incorrect ERC claims to withdraw them. Businesses that took part in the program were allowed to keep 20 percent of the credits they claimed. They were also not charged any penalties or interest. The program ended on March 22.

The IRS has renewed the program, which is now open through Nov. 22 for 2021 tax periods. To qualify, businesses must have filed an ERC claim on a 2021 employment tax return that has already been processed by the IRS, with funds disbursed.

This time, businesses who admit false applications get to keep 15 percent of the credits, which won’t be taxable as income. Businesses that use a third-party payer to file their employment tax returns or claim an ERC cannot apply for the second VDP. They have to get the payer to apply.

“If you are unable to pay your full second ERC-VDP amount, you can ask the IRS to consider you for an installment agreement to pay over time or other collection alternative,” the agency stated.

The second VDP began in August. In the first VDP, more than 2,600 applications were received by the IRS that disclosed $1.09 billion worth of false ERC credits.

The tax agency pointed out that some scammers called the ERC program by another name, such as a business stimulus payment or a grant, in order to fool victims.

“IRS continues compliance work on questionable ERC claims on multiple fronts, with thousands of audits underway and 460 criminal cases initiated,” the agency stated.

The IRS has faced criticism from lawmakers over the ERC issue. In August, Sens. Mark R. Warner (D-Va.) and Tim Kaine (D-Va.) wrote a letter to the IRS, raising concerns about the slow processing of the claims.

Businesses need answers about their ERC claims to make decisions on matters like undertaking investments in operations, capital projects, and workforce, according to the senators.

“Unfortunately, many of our constituents are telling us they cannot make informed decisions because they have no knowledge as to when and if their claims will be processed,” they wrote.

“Many Virginia organizations with ERC claims have been waiting a year or more with no response whatsoever from the agency. Despite our best efforts to advocate on behalf of these constituents, engagement from our offices have similarly yielded little to no clarity on when claims will be processed. Simply put, this is unacceptable.”