Next for the Employee Retention Credit Claims

The IRS has processed over 28,000 claims worth $2.2 billion and disallowed over 14,000 claims worth more than $1 billion in clearly improper claims since the Employee Retention Credit (ERC) claims moratorium began. Although many businesses may not have heard from the IRS on its ERC applications, the governing body has made significant progress reviewing these.

Most importantly, the IRS recently provided insight into the comprehensive review of the ERC claims that it examined so far. This review uncovered widespread issues with a significant number of improper claims after months of digitizing information and data analysis – assessing over one million ERC claims amounting to more than $86 billion. The review resulted in the IRS categorizing outstanding ERC claims in three sections:

• Likely Improper or Fraudulent. The IRS has estimated that 10 to 20% of claims were determined to be improper, at a minimum, or potentially fraudulent. The IRS will deny these claims and issue denial letters to the affected taxpayers later this summer. This high-risk group includes claims with clear signs of being outside the guidelines established by Congress, and tens of thousands of these claims will be denied in the coming weeks.
• Very Questionable. The IRS has estimated that 60 to 70% of claims were questionable and had an unacceptable level of risk, necessitating further analysis to improve compliance review. The IRS is working to expedite the resolution of valid claims while protecting against improper payments, emphasizing that the increased scrutiny during this process will be slower than the rapid payouts seen during the pandemic. The IRS will likely request additional information from taxpayers who fall into this category. Employers that have an unpaid claim filed before September 14, 2023 can expect a letter from the IRS asking for more information. They should be prepared to respond with documentation to support their claim.
• Lower Risk. The IRS estimated 10 to 20% of claims were determined as a lower risk, indicating a higher likelihood of compliance with program guidelines. These claims will continue to be processed, with refunds expected to be issued later this summer.

While the IRS has made progress sorting through backlogged ERC claims, the moratorium on processing new ERC claims filed after September 14, 2023 continues until further notice. The purpose of this is to allow the IRS to manage the backlog of existing claims and implement more stringent review processes, with a continued focus on the oldest claims and those with legitimacy filed by small businesses prior to September 14, 2023.

Taxpayers’ Next Steps While Waiting for Pending ERC Claims

What should you do if you are a taxpayer in limbo waiting for judgment on a pending ERC claim? The IRS urges taxpayers with pending ERC claims to review eligibility guidelines. If after this review, the taxpayer determines they are not eligible for the ERC, they should consider using the ERC Withdrawal Program to avoid future compliance issues. During this step, it’s recommended to work with a professional ERC consultant to navigate the claims process and assist in reviewing current claims to determine the adequacy of the application and to assist in communicating with the IRS. If you are contacted by the IRS with requests for additional information, be sure to respond in a timely manner as a lack of prompt or complete responses could result in the IRS rejecting your claim.

Below are areas the IRS has identified as common problems with ERC claims that may likely require additional information from filers and how Sikich can help:

• ERC Claims for Multiple Quarters. If your business claimed the ERC for multiple quarters, it’s critical that a careful review of each quarter’s eligibility is performed to ensure compliance. A professional ERC consultant can assess your documentation and calculations, helping to substantiate your claims and mitigate audit risks. At Sikich, our team specializes in identifying and correcting potential errors to make sure businesses’ claims are accurate and justified.
• Government Orders. It’s a best practice to retain thorough documentation and analysis that demonstrates how specific government orders impacted your operations. Detailed information on the particular government order will be requested by the IRS. Taxpayers are advised to work with a professional ERC consultant to compile the necessary evidence and narratives to support your ERC claims based on the IRS guidance provided.
  For instance, while supply chain disruptions rarely qualify for the ERC, it is important to work with a professional ERC consultant that can evaluate the specifics of your situation. Supply chain interruptions, in some cases, meet the criteria for a partial suspension of operations due to government orders. Our experts at Sikich can analyze this disruption to help assess the adequacy of the documentation to support your ERC claim.
• Suspension for a Partial Quarter. If your business operations were suspended by a specific government order for only part of a calendar quarter, choose a professional ERC consultant that can assist in accurately calculating your ERC claims for the eligible period. At Sikich, our experts can ensure your claims reflect the appropriate wages paid during the suspension period, preventing overclaims and maintaining compliance with IRS regulations.
• Gross Receipts. If a taxpayer qualifies for the ERC based on the requisite reduction in gross receipts, they also need to have adequate documentation to support this claim. In some cases, taxpayers realize they do not qualify for the ERC under the government order standard but never considered the gross receipts option – after evaluating this, they find that they satisfied the gross receipts test. A professional ERC consultant can assist with performing the gross receipts test, which determines if there was a decline in quarterly revenue.
• Employee Wage Calculations. Accurate employee wage calculations are crucial for ERC claims. Our specialists are well-versed in the legislative changes and requirements for qualified wages. Sikich offers a detailed review of your payroll data to ensure calculations are correct, preventing overclaims and aligning claims with IRS guidelines. To avoid disallowed claims, make sure your professional ERC consultant verifies that your business existed and paid wages during the eligible periods. The team at Sikich can cross-check your employer identification number (EIN) and payroll records to confirm all claims are valid and supported by accurate documentation, safeguarding your business from IRS rejections.
• ERC Promoters. Beware of promoters that suggest you have nothing to lose by claiming the ERC, as incorrect claims can lead to significant financial penalties and audits. Our team of experts at Sikich can offer a careful, compliant approach to ERC claim processing, provide a comprehensive evaluation of your claims, assist with amendments if necessary, and represent you in the event of an IRS audit.

Get in Touch with our Experienced ERC Team

If you are preparing an ERC claim or have concerns about your existing claims, our experienced team is here to help. We provide the expertise and support needed to navigate the complexities of ERC claims, ensuring your business remains compliant and maximizing your eligible credits. For inquiries, please contact Kellie Fedkenheuer at kellie.fedkenheuer@sikich.com or Andrew Creedon at andrew.creedon@sikich.com.

About our authors

Kellie Fedkenheuer, CPA/CFF, CFE, oversees and manages litigation support, forensic accounting and consulting engagements. She has assisted government agencies, government contractors, and commercial clients with claims related to both public and private projects.

Andrew Creedon, CPA, CFE, has deep audit and consulting experience, specializing in assurance services, internal controls, financial process improvement, internal audit, compliance, fraud investigations, and litigation consulting and support. He serves nonpublic entities, government contractors, not-for-profits organizations and public sector businesses.