IRS to resume processing new pandemic tax credit claims from employers

The IRS said Thursday that it will begin processing a backlog of claims for the Employee Retention Credit, a step forward for a program that was supposed to help businesses survive the coronavirus pandemic but became mired in suspicions of fraud.

In September, the agency issued a months-long moratorium on processing new claims as it differentiated a flood of dubious applications from valid ones. Now, the IRS will begin processing claims submitted between Sept. 14 and Jan. 30.

“Today, the tide is starting to turn on the Employee Retention Credit program,” IRS Commissioner Danny Werfel said Thursday. “This effort will continue and intensify in the months ahead.”

Congress created the tax credit in March 2020 to help businesses that kept paying employees after being shut down early in the pandemic. The credit was narrowly reserved for certain businesses, such as those that recorded a steep decline in revenue or those that were fully or partially shut down under government orders. But applications for the tax credit have surged the past four years after aggressive marketing tactics misled business owners into thinking they qualified.

Businesses have filed at least 3.6 million claims for the ERC since the program’s debut, The Washington Post previously reported. It has distributed at least $232 billion, Werfel said in June, far exceeding Congress’s initial expectations.

The IRS announced in June that it would deny the vast majority of claims after officials detected “red flags” in at least 70 percent of the applications awaiting processing. In recent weeks, Werfel said, the IRS has denied 28,000 high-risk claims worth about $5 billion and initiated 460 criminal cases related to fraudulent claims.

More than 7,300 businesses have retracted their ERC claims—totaling $677 million—since the IRS launched a withdrawal process last year.

Since the agency’s June announcement, some tax professionals have raised concerns that valid ERC applications are being denied outright and that businesses have unclear options to appeal. The IRS said Thursday that incorrect denials are isolated and that about 90 percent of the disallowance letters sent recently are valid.

The IRS also said it has identified 50,000 valid claims in recent weeks. Those and other low-risk claims will be paid out quickly, the agency said. It anticipates it will begin processing payments for another large block of low-risk claims in the fall.

Despite the processing pause, the IRS is still receiving about 17,000 applications for the tax credit per week, Werfel said Thursday. But he added that the moratorium helped limit the number of robocallers and TV ads targeting small businesses. Over the past four years, marketing campaigns promised businesses they could receive $26,000 in tax credits for each employee retained during the pandemic and companies behind the ads offered to file claims in exchange for a payout from the refund.

“Once we issued the moratorium, it took away the incentive for these marketers to continue to prey on small businesses because there was now a high likelihood that the claim wouldn’t be processed anytime in the near future,” Werfel said.

The ERC program was initially meant to run until April, but Werfel has called on Congress to end it early. The House passed a tax bill this year that would have ended the credit and enhanced penalties for promoting fraudulent claims in connection to it. But federal efforts to prevent new claims have stalled after the Senate struck down the House’s bipartisan tax bill last week.