There is a fair amount of activity with the IRS-processing Employee Retention (Tax) Credit (ERC) refunds with two announcements this past month. I would call it good news for those who have legitimate claims and bad news for those who filed a not-so-legitimate claim. Actually, not all bad news for the not-so-legitimate claim group.
The IRS has reopened the Voluntary Disclosure Program (VDP), which will run through November 22, 2024. As you may recall, this was started earlier this year whereby the IRS allowed you to revoke your claim and return any funds you believe were improperly claimed, keeping 20% of the claim as a sort of reward for turning yourself in. With this second round, they will allow you to keep 15% of the funds received, as well as 100% of the interest, and they will not penalize you for the incorrect filing, nor subject you to any exam or audit. This is a great way to bring your company into compliance, get some sleep at night and keep approximately 25% of the funds received. To file a VDP, use IRS Form 15434.
The VDP may not be a bad idea for anyone who did not have a legitimate claim, as the IRS has announced ramping up their review of questionable claims. They are mailing out 30,000 new disallowance letters, on top of the 28,000 they mailed out last month, reversing and recapturing potentially another $1 billion in improper ERC claims. Once the IRS catches you, the VDP is off the table and they will look to collect 100% of the claim, 100% of the interest and assess penalties.
For those who have a legitimate claim, there is some promising news. First, they have moved the moratorium date from September 15, 2023 to January 31, 2024. This is good news for those businesses who filed their ERC claim prior to January 31, 2024. Second, the IRS is concurrently reviewing 1 million returns in an automated system they developed. Yes, 1 million returns are being reviewed by what I would call a sort of AI that will compare information with data within their system as well as third parties they have access to. With this information, they are classifying the claims into three categories: high, medium and low-risk of fraud. While we do not know the criteria they are using to make the determination, it appears that most claims for the 3rd quarter of 2021 are falling into the high-risk category. Anything falling in the high- risk category will automatically generate a disallowance letter. Those that fall under the low-risk category will start processing: they have recently identified 50,000 low-risk claims which are in the pipeline to issue payments.
For those who received a disallowance letter AND you believe your claim is legitimate, do not settle on the facts of the letter. The disallowances are being performed in an automated way and it is possible there is an actual qualification. Filing a protest is available, but you need to act fast. The IRS identified that many disallowance letters were sent without the instructions as to how to file a protest. There is a short period of time, 30 days, to reply; otherwise, a suit would need to be filed. If you received a disallowance letter and the company that processed your claim is no longer responsive, reach out to PayMaster. We can help determine if your claim is valid and if so, file the necessary protest response. Contact our ERC team at erc@paymaster.net.
While we make every attempt to ensure the accuracy and reliability of the information provided in this document, the information is provided “as-is” without warranty of any kind. Romeo Chicco or PayMaster, Inc, do not accept any responsibility or liability for the accuracy, content, completeness, legality, or reliability of the information contained. This is not legal or tax advice and you should consult with your CPA, Attorney, and/or HR Professional as ERC is changing frequently.
