While pandemic-related shutdowns might feel like a distant memory, one pandemic-related tax incentive remains in the spotlight. The Employee Retention Credit (ERC) was a refundable payroll tax credit designed to support small businesses that kept employees on payroll during the pandemic.

The ERC officially ended in 2021, although businesses can retroactively apply for the credit based on wages paid between March 13, 2020, and December 31, 2021.

Unfortunately, the ability to amend previously filed payroll tax returns to claim the credit meant the program has been prone to abuse and scams. To counter fraudulent claims, the IRS implemented a more rigorous screening process.

If you’ve submitted an ERC claim or are considering filing an amended payroll tax return to claim the credit, the IRS recently announced a new phase of ERC claims processing. Don’t worry, we’re here to break it down for you in a way that’s easy to understand.

What’s Happening with ERC?

On June 20, 2024, the IRS made a big announcement about the next steps in processing ERC claims. They’ve been hard at work reviewing over a million claims, totaling a whopping $86 billion. But, here’s the kicker—they found that a lot of these claims were, let’s say, not quite up to par.

So, what’s next? The IRS is moving into a new phase where they’ll tackle those claims they think are the riskiest. They’re looking for what they call “clear signs” of errors. If a claim is waving a big red flag, it might get denied outright. For those that aren’t quite as risky but still a bit questionable (about 60-70% of claims, according to the IRS), expect some extra scrutiny.

Now, the good news is if your claim is considered low-risk, it’ll still be processed. But—and there’s always a but—it’s going to be a slow ride. The IRS is starting with the oldest claims first, so if you’ve been waiting, patience is key. You can expect payments to begin rolling out this summer but don’t hold your breath for a speedy process.

What About New Claims?

If you were hoping to file a new ERC claim after September 2023, I hate to be the bearer of bad news, but the IRS’s moratorium on these claims is still in effect. No new claims are being processed right now, and there’s no end in sight for this pause.

Worried About Your Claim?

If you’re sweating bullets thinking your claim might have a few errors, there’s an option for you. The ERC withdrawal program is still available, which might save you some headaches if you think your claim could get flagged. Unfortunately, the ERC Voluntary Disclosure Program has closed for now, but keep an eye out—it might reopen in the future with less favorable terms.

Possible Legislative Changes

In other news, the IRS is lobbying for Congress to pass legislation that would give them more time to review these claims. They’re pushing for a six-year review period from the date of the refund check rather than the standard three years from the claim date. This would be a big help to the IRS, considering they’ve got mountains of claims to sift through.

What Should You Do Next?

Here’s the golden nugget of advice: if you receive any correspondence from the IRS about your ERC claim, don’t panic. It’s crucial to respond promptly, as these letters usually come with tight deadlines. Reach out to a trusted tax advisor—like your friends at NewWay Accounting—to help you navigate the process.

Keeping your business thriving through a global pandemic is no small feat, and we want to help you take advantage of every (legal) tax break. But don’t be swayed by aggressive ERC credit promoters who make promises that sound too good to be true. They typically charge a hefty contingency fee to help well-intentioned business owners apply for ERCs they may not qualify for and leave the small business owner hanging when the IRS questions the claim’s validity and levies penalties.