IRS Employee Retention Credit (ERC) Audits: New Payments, Denials, and Appeals

Following a ten-month hiatus, the Internal Revenue Service (IRS) has updated the public on the status of processing Employee Retention Credit (ERC) claims. While the news is good for those with legitimate claims stuck in the pipeline, 28,000 disallowance letters have also been mailed in recent weeks—including an unknown number that inadvertently omitted a paragraph describing the appeals process.

ERC Overwhelm and Moratorium

The wildly popular ERC program was one of several Federal initiatives passed during the pandemic to provide financial relief to business owners impacted by lockdowns and the stifled economy. The program offered payroll tax credits to eligible employers to pay all or part of qualified wages to some (or all) of their employees between March 12, 2020, and January 1, 2022.

Additional details about the eligibility requirements for the Employee Retention Credit can be found in Impact of the New Stimulus Package: Extension & Expansion of the Employee Retention Credit (ERC).

The complexity of the ERC program—along with a substantial amount of fraudulent and invalid claims—led the IRS to place a moratorium on processing ERC claims on September 14, 2023. They’ve recently begun to process ERC claims filed between September 14, 2023, and January 1, 2024.

Disallowed ERC Claims

Many credible firms— as well as unscrupulous processors— offer assistance to businesses to help them process employee retention credit claims. Bad actors’ relentless marketing efforts with inaccurate or incomplete information persuaded many business owners to apply for credits they were not eligible for, crippling the system put in place to aid business owners.   

During the moratorium, the IRS digitized the ERC claims filed, analyzed them, and recently issued 28,000 disallowance letters. The IRS recognizes that some of these claims may be valid but believes that more the 90% of them were invalidly issued. Companies who received these notices may appeal their disallowance with the IRS.

ERC Valid Claim Processing

The IRS has also processed 50,000 refund payments on low-risk valid claims and anticipates making another large block of payments this fall. ERC claims and their eligibility are based on payroll quarterly tax periods and businesses may have some claims approved and others disallowed depending on their circumstances.

ERC Eligibility and Denials

Employee Retention Credit compliance required keeping detailed records and having a firm grasp on its effective dates and the processing status for each employee record. Outright fraud is easy to understand—the IRS has initiated 460 criminal cases to date for this program including well over $6 billion in claims—but honest employers may also become entangled in an audit after receiving a disallowance letter.

• ERC eligibility can vary from one tax period to another. Examples:
  • If a government order was no longer in place
  • The business’s gross receipts increase
• Qualified wages may have varied due to a forgiven Paycheck Protection Program (PPP) Loan.
• The employer may have already claimed the maximum amount of qualified wages during an earlier tax period.

Is an audit inevitable?

If you have an Outstanding ERC Claim or you’ve received a disallowance letter, you may become subject to further scrutiny in an ERC audit. If your ERC claim is legitimate, you have the right to claim the credit and its benefits.

If your understanding has changed since you originally filed a claim and you don’t believe your ERC claim should proceed, you can participate in the Internal Revenue Service’s ERC Claim Withdrawal process. More than 7,300 have done so and withdrawn $677 million in claims.

Given the potential threat of civil or criminal prosecution—in addition to an IRS audit— claiming employee retention credits can feel daunting, but if your business qualifies for the credit and it hasn’t been claimed, it’s still possible to do so.

REDW State and Local Tax (SALT) professionals can assist businesses with processing or withdrawing claims, providing audit support, and analyzing your unique circumstance.

Reach out to us today for a free consult.

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