Recent Developments with the Employee Retention Credit (ERC)

Since its inception over four years ago, the Employee Retention Credit (ERC) has seen a number of ongoing and significant changes in the interest of providing tax relief for individuals and business owners. (Catch up on our guidance and advice here. And, here and here.)

Over the past few weeks, more IRS updates have occurred that impact this credit and taxpayers’ existing claims. The following is a summary of these updates:

And don’t miss our webinar about the ERC credit and related claims on September 24. Register here.

ERC Moratorium

On August 8, 2024, the IRS announced an extension of the ERC moratorium, effectively starting to process ERC claims filed from September 14, 2023 to January 31, 2024. The IRS, which previously indicated it would process existing ERC claims in its pipeline that were filed on or before September 14, 2023, extended its moratorium timeline with this announcement. Therefore, any ERC claims filed after September 14, 2023 and through January 31, 2024 will now start to be reviewed by the IRS.

The change to the moratorium timeline does not guarantee that claims will be paid; rather the IRS will now begin its detailed review process focusing on the highest and lowest risk claims. Low risk claims still can be processed and paid, but other claims may require the taxpayer to provide additional supporting documentation, or, in some cases, the claim may be rejected.

ERC claims filed after January 31, 2024 will be part of the revised moratorium and held for further review by the IRS.

Voluntary Disclosure Program: Round 2

On August 15, 2024, the IRS unveiled its second Voluntary Disclosure Program (VDP), marking its latest move on the ERC. The IRS had implemented a VDP last December that expired on March 22, 2024, allowing taxpayers to repay 80% of their ERC claim that they determined they were not eligible for.

Round two of the VDP applies to ERC received in 2021 (meaning nothing for the 2020 year), and taxpayers are only required to repay 85% of the credit they received. The 15% discount is more generous than many experts expected for this second VDP round.

To qualify for the program, a participant is required to do the following:

• Apply to the ERC-VDP program using Form 15434, Application for Second ERC Voluntary Disclosure Program.
• Cooperate with the IRS, such as for any requests for more information.
• Voluntarily pay back the entire ERC received, minus 15%.
• Sign a closing agreement, which provides finality to the matter.

The deadline for completing this is November 22, 2024, and it is expected that this will be the last VDP program offered for the ERC. With that said, now is the time to review your 2021 ERC claims and ensure that requirements were met, as not all taxpayers who received an ERC refund are eligible for the VDP. Work with a tax consultant to see if you should take advantage of this program and review the VDP with legal counsel. For more information, the IRS has an FAQ on the second VDP initiative.

ERC Disallowance Letters & Guidance from National Taxpayer Advocate

The IRS recently sent ERC disallowance letters indicating it did not believe some taxpayers were entitled to ERC refunds. Soon after sending these letters, the IRS concluded that some letters disallowing ERC claims (for showing high risks of being incorrect) may have been inaccurate. The IRS is currently working to identify corrective action and noted in a statement that, “While we [the IRS] are still evaluating the results of this first significant wave of disallowances in 2024, early indications [show] errors are relatively isolated and that more than 90% of disallowance notices were validly issued.” Therefore, the IRS is currently working to remedy the remaining 10%.  

On August 21, 2024, the National Taxpayer Advocate (NTA) representing the Taxpayer Advocate Service within the IRS published an announcement in response to the ERC disallowance letters mentioned above. The NTA aimed to provide additional guidance for taxpayers that received these letters. Several highlights are noted here:

• The process used by the IRS to generate ERC disallowance letters differed from its regular procedures. The IRS typically issues a claim disallowance after it has conducted an audit of the claim. During the audit, the taxpayer can provide documentation to support their refund claim. If the claim is then denied by the IRS, the taxpayer can decide to have their audit turned over to the IRS Office of Appeals (Appeals).
• Amid the backlog of ERC claims, the IRS did not conduct an audit of the disallowed ERC claims but instead employed a risk-scoring analytic process. The NTA notes, “The IRS’s analytics determined the claim showed a high risk of being incorrect without first conducting an examination.”
• Another departure from normal IRS procedures are the steps a taxpayer takes in response to the disallowance letter. Taxpayers who object to a denied ERC claim will have their response reviewed by a Revenue Agent, not Appeals. These steps could add confusion to the process and further extend the timeline for resolving the case.

We strongly advise taxpayers that received a disallowance letter to consult with their tax advisors. During this review, evaluate the specifics of the letter and gather workpapers that support the claim. Follow the steps outlined in the letter to challenge the disallowance in cases where you believe the claim is compliant and the disallowance letter is in error.  You should plan to respond by the due date provided in the letter or you may jeopardize your ability to collect the ERC refund.

Recommended Next Steps with ERC Claims

The IRS’s latest enforcement initiative announcements related to the ERC highlight the IRS’s continued scrutiny of paid and unpaid claims. It is important for those with an ERC claim to stay informed and consider their options. The cash flow impact to some taxpayers of having to pay back a claim, or simply write off a claim that they were expecting, can be difficult. We recommend the following in order to be prepared in the event your ERC claim is partially or fully disallowed:

• Review the recent IRS guidance on the ERC and its current enforcement programs. Understand the impact of your ERC claim being disallowed or recaptured. Also understand how long the statute of limitations could remain open on your ERC claim.  Remember that the statute for a third quarter 2021 claim was extended to five years from previous legislation (three years).
• Be proactive and confirm that you have a complete and accurate workpaper file supporting your ERC claim and then conduct an internal audit of your documentation and support. Some IRS notices only give taxpayers 30 days to respond. This isn’t much time. If the documentation is not pulled together, we recommend working with an experienced tax advisor to collect the required documentation.
• Review the IRS list of red flags related to ERC claims. If many of these red flags apply to you, consult with your advisors about your situation and the support for the claim filed. The current VDP program allows taxpayers to repay 85% of the claim, and that may be the best option for some. The IRS has set a deadline for filing these, and the risk is they may have plans for more enforcement once this date passes.
• For businesses that are considering owner succession or an outright sale, it is especially important to mitigate the risk of a claw back of ERC refunds for the new owners. It may be necessary to escrow the ERC refunds until the statute of limitations has passed.

Ultimately, we recommend that taxpayers be proactive. Many ERC claims were prepared in haste and with limited information, and the documentation may be lacking as a result. The IRS has been very transparent about their intent to review claims and uncover improper payments. Our ERC professionals are available to discuss your situation and can assist as necessary.

Join us on September 24 to discuss this in greater detail with our experts.

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.

Tom Bayer, CPA, CExP, has specialized expertise in the areas of business succession planning, tax planning and compliance, and business advisory. He has deep experience providing a range of accounting, tax, and business advisory services to commercial clients across industries.

Jim Brandenburg, CPA, MST, possesses extensive experience and knowledge in corporate and partnership tax law, mergers and acquisitions, and tax legislation. His expertise includes working with owners of closely held businesses to identify tax planning opportunities and assist them in implementing these strategies.