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The IRS is Processing ERC Claims “Slowly and Judiciously” as It Maintains Focus on ERC Fraud

June 7, 2024

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A recent article on Forbes.com discusses a lawsuit filed against the Internal Revenue Service (IRS) that seeks to force the agency to lift its moratorium on new Employee Retention Credit (ERC) claims. The IRS imposed its moratorium last September amidst concerns of widespread fraud under the ERC program, and, according to a recent News Release, the IRS still has a backlog of 1.4 million unprocessed claims. This has significant implications for all companies (and individuals) that have filed ERC claims, as Texas IRS lawyer Lawrence Brown explains:

In response to the lawsuit, the IRS has argued that the moratorium does not harm employers (who “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”), and it has also provided some notable insights into its ongoing efforts to simultaneously process valid ERC claims and prosecute ERC fraud. For example, Forbes.com quotes IRS Deputy Commissioner Douglas O’Donnell as stating:

“Knowing the significant risk of the paper claims in inventory, we will process claims that have the highest risk of ineligibility, looking on a first-in first-out basis starting with claims filed before the moratorium . . . . We also will process claims that have the lowest risk of ineligibility . . . . The processing of those claims will occur over the summer. We expect the pace to go slowly and judiciously as we continue to refine our analytical tools.”

In its June 30, 2024 News Release, the IRS sheds even more light on its ERC-related priorities, stating that it intends to keep the moratorium in place while processing valid claims as quickly as it can—and while ultimately placing the greatest emphasis on making sure that no more invalid claims result in fraudulent refunds.

IRS Denies Invalid ERC Claims While Pursuing Audits and Investigations as Warranted

The IRS’s News Release highlights the agency’s efforts to scrutinize questionable ERC claims, noting that to date it has disallowed more than 14,000 claims “worth more than $1 billion.” The News Release also states that the IRS “plans to deny tens of thousands of [additional] improper high-risk Employee Retention Credit claims in the coming months.”

But, for companies (and individuals) that have filed improper ERC claims, denial is not the only concern. The IRS is also pursuing audits and investigations as warranted. According to the IRS, thousands of ERC-related audits are currently underway, and IRS Criminal Investigation (IRS CI) has initiated close to 500 ERC-related investigations—which so far have resulted in 36 indictments and 16 convictions.

Further highlighting the scope of the fraud perpetrated under the ERC program, the IRS also notes that its now-closed ERC Voluntary Disclosure Program (VDP) resulted in disclosure of $1.09 billion in fraudulent ERC claims, while its ERC claim withdrawal process—which remains open—has resulted in $531 million in invalid ERC claims being voluntarily withdrawn.

Options for Companies (and Individuals) that Have ERC-Related Concerns

For company owners and executives (and other individuals) who have ERC-related concerns, what is the best path forward? The answer to this question varies case by case. For example:

1. If You Inadvertently Filed an Improper ERC Claim that is Still Pending

If you inadvertently filed an improper ERC claim that is still pending, your best option may be to file for withdrawal. As noted above, the IRS’s ERC withdrawal program remains open, and withdrawal is an option for filers who “now think that [their business is] entitled to $0 ERC.” There are additional eligibility criteria as well, and, crucially, the IRS has made clear that filing for withdrawal does not insulate companies or individuals against prosecution for fraud.

2. If You Willfully Filed an Improper ERC Claim that is Still Pending

With this in mind, for those who have concerns about facing fraud allegations, submitting a voluntary disclosure may be the better approach. While the IRS’s ERC VDP has closed, IRS CI’s Voluntary Disclosure Practice remains an option for those who need to resolve willful violations of the law. While submitting a voluntary disclosure can result in IRS CI deciding not to recommend prosecution, navigating the process successfully requires an informed and strategic approach. As a result, experienced legal representation is critical.

3. If You Received a Refund for an Improper ERC Claim (Inadvertently or Willfully Filed)

If you received a refund for an improper ERC claim, it is too late to file for withdrawal. At this stage, you will need to consider other options—which may include submitting a voluntary disclosure depending on the circumstances involved. But there are other possibilities as well, and here, too, you will need to rely on experienced legal counsel to make an informed and strategic decision.

4. If the IRS has Initiated an ERC-Related Audit or Investigation

If the IRS has opened an audit or IRS CI has initiated an investigation, you should engage an experienced Texas IRS lawyer immediately. While audits are civil in nature, both audits and investigations can lead to criminal charges if revenue agents have reason to believe that the submission of a fraudulent ERC claim was willful.

5. If You Disagree with the IRS’ Determination that Your Company’s ERC Claim was Improper

What if the IRS has denied your company’s ERC claim and you disagree that the claim was improper? In this scenario, your next step may be to file an appeal. Before you file an appeal, however, you will want to make sure that you are confident in your position—as seeking to reopen an invalid ERC claim could lead to additional adverse consequences.

Request an Appointment with a Texas IRS Lawyer at Brown Tax, P.C.

If you need to know how to address ERC-related concerns with the IRS (or IRS CI), we encourage you to get in touch. To request an appointment with a Texas IRS lawyer at Brown Tax, P.C., please call 888-870-0025 or send us a confidential message online today.

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