Accounting
IRS processing more ERC claims, moves moratorium date to Jan. 31, 2024
The Internal Revenue Service is paying out more claims for the Employee Retention Credit program even as it gives the claims greater scrutiny, and is moving the moratorium on processing new claims from Sept. 14, 2023 to Jan. 31, 2024.
The IRS is continuing to issue denials of improper ERC claims, while intensifying its audits and pursuing civil and criminal investigations of potential fraud and abuse. The findings of an IRS review, announced in June, confirmed concerns raised by tax professionals and others that there was an extremely high rate of improper ERC claims in the current inventory of ERC claims.
In recent weeks, the IRS has sent out 28,000 disallowance letters to businesses whose claims showed a high risk of being incorrect. The IRS estimates these disallowances will prevent up to $5 billion in improper payments. Thousands of audits are underway, and 460 criminal cases have been initiated. The IRS has also identified 50,000 valid ERC claims and is quickly moving them into the pipeline for payment processing in the weeks ahead. These payments are part of a so-called low-risk group of claims.
Given the complexity of the ERC and to reduce the risk of improper payments, the IRS emphasized it is moving methodically and deliberately on both the disallowances as well as additional payments to balance the needs of businesses with legitimate claims against the promoter-fueled wave of improper claims that came into the agency.
“The Employee Retention Credit is one of the most complex tax provisions ever administered by the IRS,” said IRS Commissioner Danny Werfel during a press call Thursday. “It’s technically detailed and resource intensive, and our challenges grew exponentially with the flood of promoter claims that came pouring in well after the pandemic ended. Our teams have been working hard to navigate this complex landscape. We’ve been focused on balancing our efforts to protect taxpayers from improper claims while also working to speed more payments to qualifying businesses. It has been a time-consuming process to separate valid claims from invalid ones. By no means has this been a simple situation.”
He noted these are not simple 1040 forms that can be quickly reviewed and paid out by the IRS. “These claims span multiple tax law changes, multiple calendar year quarters and have differing payment amounts,” said Werfel. “These have to be worked individually, claim by claim, and they all come in on paper, adding even further to the complexity of sorting valid claims from invalid ones. During the past year, we maintained a slow, judicious cadence of both ERC approvals and disapprovals, but we are now taking important steps forward to intensify our pace and begin reducing the overall inventory of pending ERC claims. Today, we are moving forward with our long held plans to continue to deny claims when they appear improper, and also moving to pay out more legitimate claims. We’re doing this by moving a substantial group of claims into both categories.”
He pointed out that the Employee Retention Credit was created by Congress to help businesses weather the pandemic. “It served as a lifeline for struggling businesses trying to get through this unprecedented period, and as members of Congress have noted, the program worked as intended during the crisis period,” said Werfel. “But then aggressive promoters moved in. Last year, promoters intensified their marketing, bombarding the airwaves with ads and aggressive marketing. You couldn’t turn on the TV or radio without coming across an ERC ad. These promoters urged people to file what they called risk-free claims with the IRS for the ERC. At the same time, they charged a hefty percentage on the potential payouts. The program turned into a gold rush for promoters. These promoters and the taxpayers they pulled in swamped the IRS with incoming applications, clogging our processing centers and harming small businesses filing legitimate claims. Tax professionals sounded the alarm bells to me and others on this, sharing that the marketers were pulling in taxpayers that clearly didn’t qualify under the intricate program rules.”
To counter this torrent of activity, last fall he announced
During this period, the IRS learned valuable information that will help guide the program down the tracks in the months ahead.
Faster pace
“Going forward, we will proceed at a faster pace on both approvals and denials than before. But it will remain a measured and responsible pace that won’t go off the rails, protecting both taxpayers and revenue,” said Werfel. “As we move ahead, we’re going to continue protecting taxpayers from improper claims. In the last few weeks, we’ve had about 28,000 letters go out, disallowing claims up to potentially $5 billion.”
However, the IRS has also heard concerns from some tax professionals that it may be disallowing legitimate ERC claims.
“With these recent disallowance letters going out, the IRS is aware of concerns raised by tax professionals about potential errors,” said Werfel. “While the IRS is still evaluating the results of this first significant wave of disallowances in 2024, our early indications show these errors appear to be isolated. The concerns flagged, which we are currently looking into, impact less than 10% of the disallowance letters sent. We are closely watching this, and it’s important to keep in mind, there was a wide range of businesses and claims that came in due to the heavy marketing. It’s a big sea of claims from a diverse set of taxpayers. Even then, it’s not surprising, given the complexity of this credit, that there are some questions. That’s why we’re not rushing to push out large volumes of these denials immediately. This is uncharted territory for the IRS, and we are navigating the landscape carefully.”
He pledged to continue to work with tax professionals. “As part of this, the IRS will stay in contact with the tax community,” said Werfel. “We will monitor the situation involving disallowances and make any adjustments to minimize burden on businesses and their representatives. Where we need to, the IRS will adjust its processes and filters for determining an invalid claim following each wave of disallowances. This is a responsible and judicious way of administering this complex tax law, and we need to be measured and not just rush to resolve claims.”
He noted that in cases where claims can be proven to have been improperly denied, the agency will work with taxpayers to get it right. The IRS is also reminding businesses that when they receive a denial of an ERC claim, they have options available to to file an
“At the same time, we are announcing today that we’re sending 50,000 more claims out into processing for payment in the next few weeks,” said Werfel. “These claims will total up to $5 billion. This means more low-risk ERC claims will be paid out quickly. There are a couple of steps for the payments to go through. We have moved these claims into the processing pipeline, and after that, they will go into the payment process. The IRS projects the first of this group of payments will begin in September, with additional payments going out in subsequent weeks. As the IRS begins to process additional claims, the agency reminds businesses that they may receive payments for some valid tax periods, generally quarters, while the IRS continues to review other periods for eligibility.”
Moratorium update
Werfel also provided an update on the processing moratorium on new ERC claims. Previously, the agency was not processing claims filed after Sept. 14, 2023. As the agency moves forward, it will now start judiciously processing claims filed between Sept. 14, 2023, and Jan. 31, 2024. Like the rest of the ERC inventory, work will focus on the highest and lowest risk claims at the top and bottom end of the spectrum. This means there will be instances where the agency will start taking actions on claims submitted in this time period when the agency has seen a sound basis to pay or deny a refund claim.
“Of course, we will also be working older claims during this period as well,” Werfel added. “For any of these claims, whether the older ones or the ones covered by the new moratorium date, here’s what we will do. When we identify a claim as low risk, we will be taking steps to pay it, and when we see a high-risk claim, we will deny it. We will have more to say on ERC in the coming weeks. The IRS also continues to urge employers with pending ERC claims or ones with questions about previously approved claims to review eligibility requirements to make sure they meet the specific criteria.”
The IRS
“Businesses with claims that show these red flags should review eligibility requirements and talk to a trusted tax professional about their claim,” said Werfel. “For businesses with concerns about pending claims, the IRS encourages them to consider the ERC claim withdrawal program. This allows them to remove a pending ERC claim, one the IRS has not processed yet they would. They can withdraw the claim and pay no interest or penalty.”
Already the
“Unfortunately, this route forward was made much more complicated by the flood of marketers and promoters pushing businesses to claim these credits,” said Werfel. “This created a perfect storm that added risk of improper payments for taxpayers and the government, while complicating processing for the IRS and slowing claims to legitimate businesses. Today, the tide is starting to turn on the Employee Retention Credit program. For the good of businesses with legitimate claims, and for the good of administering our nation’s tax laws, it’s critical we move forward to resolve this pandemic era program. This effort will continue and intensify in the months ahead.”
The House Ways and Means Committee held a hearing Tuesday to mark up the so-called “one, big beautiful bill” extending the expiring provisions of the Tax Cuts and Jobs Act while adding other tax breaks for tip income, overtime pay and Social Security income and eliminating tax credits from the Inflation Reduction Act for renewable energy as well as the Direct File and Free File programs.
“Today, this Committee will move forward on President Trump’s promise of delivering historic tax relief to working families, farmers and small businesses,” said committee chair Jason Smith, R-Missouri, in his opening statement. “The One Big Beautiful Bill is the key to making America great again. This moment has been years in the making. While Democrats were defending IRS audits on the middle class and tax carveouts for the wealthy, Republicans on this Committee got on the road, to hear from real Americans about how the 2017 tax cuts benefited them. This bill wasn’t drafted by special interests or K Street lobbyists. It was drafted by the American people in communities across the country.”
Democrats blasted the bill. “In 2017, Republicans passed a tax law that was supposed to pay for itself, raise wages, and help working families,” said ranking member Richard Neal, D-Massachusetts. “None of that happened. Instead, it exploded the deficit, worsened inequality, and left everyday Americans behind. Now they want to double down on the same failed playbook. One that rigs the system for billionaires and big corporations while everyone else pays the price.”
Among the provisions, the bill would make the expiring rate and bracket changes of the TCJA permanent and increase the inflation adjustment for all brackets excluding the 37% threshold, according to a
Other changes and limitations to itemized deductions would be made permanent, including the limitation on personal casualty losses and wagering losses and termination of miscellaneous itemized deductions, Pease limitation on itemized deductions, and certain moving expenses.
The bill is likely to go through some changes when it goes to the Senate. “Politically, we’ve been talking about the process for the last couple months,” said Mark Baran, managing director at CBIZ’s national tax office. “Congress is finally able to pass a concurrent resolution to unlock the budget reconciliation process.”
“The House and the Senate have completely different instructions on what they’re going to cut and how they’re going to score,” he added. “Some of that’s very controversial, and that needs to be worked out. But now we’re getting into the actual crafting of provisions and legislation.”
According to a
The bill would also allow businesses to include amortization and depreciation when figuring the business interest limitation through Dec. 31, 2029, while making permanent the excess business loss limitation.
In addition, the bill would retroactively terminate the Employee Retention Tax Credit for taxpayers who filed refund claims after Jan. 31, 2024.
In keeping with Trump campaign promises, the bill would eliminate taxes on tips for employees in certain defined industries where tipping has been a traditional form of compensation. There would be a new $4,000 deduction for seniors that phases out starting at $75,000 of income. The bill would also eliminate taxes on overtime pay.
The bill would give individuals an above-the-line deduction for interest on loans used to purchase American-made cars, but that would be capped at $10,000 with income phaseouts starting at $100,000 (single) and $200,000 (married filing jointly).
The bill would also increase taxes on certain private college investment income up to a maximum of 21% on universities with a student-adjusted endowment above $2 million.
It would also roll back some of the renewable energy provisions from the Inflation Reduction, including a phaseout and restrictions on clean energy facilities starting in 2029, while also limiting or eliminating clean housing energy and vehicle credits. The bill would sunset major IRA clean electricity tax credits, including the clean electricity production tax credit (45Y), clean electricity investment tax credit (48E), and nuclear electricity production tax credit (45U) begin phasing out after 2028 and finish phasing out by the end of 2031; repeal hydrogen production credit (45V) for facilities beginning construction after 2025, according to the Tax Foundation. It would also phase out advanced manufacturing production credit (45X) for wind energy components after 2027, for all other eligible components after 2031. Across several IRA clean energy credits, the bill would repeal transferability after the end of 2027 and further limit credits based on involvement of foreign entities of concern. On the other hand, it would expand the clean fuel production credit (45K), and tighten rules on the 126(m) limitation for executive compensation.
The bill would terminate the current Direct File program at the Internal Revenue Service and establish a public-private partnership between the IRS and private sector tax preparation services to offer free tax filing, replacing both the existing Direct File and Free File programs.
The Federal Accounting Standards Advisory Board is asking for input on emerging accounting issues and questions related to reporting entity reorganizations and abolishments as the federal government endures wide-ranging layoffs and reductions in force, including the elimination of entire agencies by the Elon Musk-led Department of Government Efficiency.
“Federal agencies and their functions, from time to time, have been reorganized and abolished,” said FASAB in its
Reorganization refers to a transfer, consolidation, coordination, authorization or abolition of one (or more) agency or agencies or a part of their functions. Abolition is a type of reorganization and refers to the whole or part of an agency that does not have, upon the effective date of the reorganization, any functions.
The Trump administration has recently moved to all but eliminate parts of the federal government such as the U.S. Agency for International Development and the Consumer Financial Protection Bureau, and earlier this month, Republicans on the House Financial Services Committee
FASAB issues federal financial accounting standards and provides timely guidance. Practitioner responses to the request for information will support its efforts to identify, research and respond to emerging accounting and reporting issues related to reorganization and abolishment activities, such as transfers of assets and liabilities among federal reporting entities. The input will be used to help inform any potential staff recommendations and alternatives for FASAB to consider regarding short- and long-term actions and updates to federal accounting standards and guidance in this area.
The questions include:
- Have any recent or ongoing reorganization activities or events affected the scope of functions, assets, liabilities, net position, revenues, and expenses assigned to your reporting entity (or, for auditors, your auditees)? If so, please describe.
- What accounting issues have you (or your auditees) encountered (or do you anticipate) in connection with recent or potential reorganization activities and events?
- Please describe the sources of standards and guidance that you (or your auditees) are applying to recent, ongoing, or pending reorganization activities and events.
- Have you experienced any difficulties or identified gaps in the accounting and disclosure standards for reorganization activities and events? What potential improvements would you recommend, if any?
FASAB is asking for responses by July 15, 2025, but acknowledged that late or follow-up submissions may be necessary given the provisional nature of the request. Responses should be emailed to [email protected] with “RERA RFI response” on the subject line.
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