The Employee Retention Credit (ERC), available for 2020 and most of 2021, has been a significant opportunity for businesses to help offset the financial impact of COVID-19. On September 14, 2023, the IRS announced that it was pausing the processing of any new ERC claims so it could implement safeguards against improper claims. On October 10, 2024, the IRS announced they were lifting the moratorium and processing 400,000 claims worth approximately $10 billion. Previously, the IRS had also announced that they were issuing 28,000 disallowance letters for refund claims totaling $5 billion that they believed were “a high risk of being incorrect.” The IRS stated, “more than 90% of disallowance notices were validly issued,” which implies that the IRS recognizes as many as 10% of its disallowance notices may have been sent in error.
The promising news is that the IRS has started issuing refunds again for the approximately 400,000 claims the IRS deemed low-risk, so some companies could start seeing cash in the near term. Once the IRS clears the ERC claims filed before September 14, 2023, it will start working on the claims filed after the moratorium date. That being said, limited information has been released on how the IRS is classifying claims into risk categories of low, medium, and high. Given the IRS’ focus on denying “high-risk” ERC claims, and now issuing refunds for claims they deem “low-risk,” it seems that the IRS is continuing to delay a large number of refund claims they deem “medium-risk” until they can be evaluated in greater detail. In addition, the IRS started auditing some claims classified as medium-risk.
What to Do if an ERC Refund Disallowance Letter Is Received
Many companies could receive disallowance letters from the IRS in the coming months. These companies may hold that they meet the IRS’ stated eligibility criteria for the ERC program. If your organization receives an ERC disallowance letter, we encourage you to contact your tax advisor or professional advisor at Forvis Mazars immediately, as the IRS generally allows for two years (from the date of the original claim disallowance) to file suit. According to the IRS, a refund cannot be issued or a credit allowed after the two-year period unless a suit is filed during that time. If you do not file within that two-year period, you may lose the ability to receive a refund. Alternatively, taxpayers may file a protest with the IRS to appeal the disallowance. This typically must be done within 30 days from the issuance date of the disallowance letter. However, the IRS recently extended this timeframe to allow for up to two years to request an appeal. Note, this does not extend the two-year timeframe for filing suit. Once a copy of the letter is received, your tax advisor can discuss your options, which are:
- File a protest to administratively appeal the matter
- File a refund lawsuit in court challenging the IRS’ denial of the ERC claim (within two years)
- Do nothing and forgo the ERC refund
Is There a Way to Get an Update From the IRS on My ERC Refund Request?
Unfortunately, a company’s options are limited if they are still waiting on an ERC refund claim, as there is no online option to check the claim status. When we or our clients have called the IRS to get an update, the IRS has been able to confirm if the amended payroll tax returns were received (or not) but it has been unable to provide a timeline on when the checks would be issued. They can also confirm if a refund check has already been issued, and in some limited cases, where the IRS has issued a check that a client has not received. If a business would like to call the IRS to get a limited update, they can call 800.829.4933. Calling first thing in the morning may offer shorter wait times on the line.
For some clients, our Tax Controversy team has requested a formal transcript from the IRS detailing activity on a taxpayer’s account. In addition, our team has been working on a case-by-case basis with the IRS’ Taxpayer Advocate Service team (TAS) to resolve some open claims. Both options have had mixed success, though they provide a tangible next step.
If you have questions or would like to work with our Tax Controversy team, please reach out to a professional at Forvis Mazars.