As IRS Continues to Manually Review 1.4 Million ERC Claims, Fraud Remains a Significant Concern

Internal Revenue Service (IRS) Deputy Commissioner Douglas O’Donnell recently acknowledged that the agency had approximately 1.4 million Employee Retention Credit (ERC) claims pending as of May 2024. This is true even though the IRS issued a moratorium on new claims late last year. There are two primary reasons for this backlog, both of which present concerns for businesses that may have filed invalid claims. Washington D.C. tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, explains:

The IRS is Reviewing Pending ERC Claims “Slowly and Judiciously”

Deputy Commissioner O’Donnell also stated that, despite the backlog, the IRS is continuing to review pending ERC claims “slowly and judiciously” as it continues to “refine [its] analytical tools.” In other words, the IRS is carefully scrutinizing pending claims for signs of ERC fraud. While the IRS has an interest in efficient administration of its duties (including its duty to review pending filings), it has a stronger interest in closing the tax gap through enforcement. Thus, as stated above, the reasons for the current ERC processing backlog are twofold:

• Since most ERC claims have been filed using paper returns, IRS agents must review them manually (while the IRS can digitize paper filings, its system for doing so is “aged” and cannot independently analyzer ERC claims for signs of fraud); and,
• In light of widespread fraud under the ERC program, the IRS closely scrutinizing all ERC filings that present “red flags” for fraud (this stands in contrast to the IRS' practice of quickly processing ERC claims without significant scrutiny during the pandemic, which contributed, in part, to the volume of fraud under the program).

For businesses with pending ERC claims, this means that both: (i) any refunds they are owed are likely to be significantly delayed; and, (ii) any apparent “red flags” are highly likely to lead to further scrutiny. With this in mind, business owners who have filed ERC claims and not yet received refunds should consider reviewing their filings to reassess compliance—and taking appropriate remedial action to avoid scrutiny if necessary. Depending on the circumstances, this could mean amending the business’s filing, or it could mean withdrawing the business’s claim entirely. In some cases, business owners may need to consider other alternatives as well.

Notably, while the IRS' moratorium on new ERC claims remains in effect, Deputy Commissioner O’Donnell also acknowledged that businesses seeking to claim the ERC in 2024 are not without options. As summarized by Forbes.com, businesses “remain free to file refund suits in federal court, provided the statutory six-month waiting period has passed, and will receive interest on their claims if they are meritorious.”

Schedule a Confidential Consultation with Washington D.C. Tax Attorney Kevin E. Thorn

If you have questions or concerns about your business’s ERC claim, or if you are facing ERC-related scrutiny from the IRS, we encourage you to contact us promptly for more information. To schedule a confidential consultation with Washington D.C. tax attorney Kevin E. Thorn, please call 202-349-4033 or request an appointment online today.