ERTC Update – Processing and New Legislation

On January 10, 2024, the IRS provided an update on the Employee Retention Credit or ERC (also referred to as the Employee Retention Tax Credit or ERTC) processing to the Senate Finance Committee. And now, one week later, new legislation is currently under review with the House Ways and Means Committees that questions the future of the program.

PBO Advisory Group’s Scott Palka provides an overview:

Claims Processing

As a backdrop, the IRS paused processing new claims arriving on/after September 14, 2023, and stated that they were significantly slowing processing of unprocessed claims in the backlog as of September 14, 2023.

On January 10 the IRS announced that they are working to digitize information on pending ERC/ERTC claims. The digitization will help to more rapidly detect fraud and allow the processing of refunds of valid claims more quickly.

Proposed Legislation

On January 16, 2024, the Senate Finance Committee and the House Ways and Means Committee released the framework for proposed legislation that would significantly change the ERC/ERTC program. Most notably, the proposal would prevent the filing of ERC claims after January 31, 2024. The earliest the House could vote on the proposal is the week of January 29, 2024, with some observers believing it will be no sooner than March of this year, if not later.

As of this writing, the time period to assert a claim for 2020 remains April 15, 2024, and for 2021 claims is April 15, 2025.  However, with the potential to cut filing requirements by two or more years, and the deadline to file a claim potentially looming, PBO Advisory is closely tracking the situation and will provide updates as soon as additional information becomes available.

Additional Claims Processing Insights

If you are awaiting a claim to be processed or intend to file a claim, here is additional information you should consider.

The IRS is utilizing a few checks and balances to determine if the amount claimed made sense relative to other data the IRS already had, such as total number of W-2s issued, confirming that the employer actually reported W-2 wages, etc.

What we have seen recently is a minor increase in requests to examine claims in the past several months including the supporting documents and basis for being an eligible employer. Our team has also seen several “proposed adjustments” advanced by the IRS.  This secondary category appears to be based on the IRS performing “analytic” reviews. For example, an employer issued 12 W-2s in 2020, the IRS assumes the most the employer could claim is 12 x $5,000 each employee for a total of $60,000.  If the employer claimed a total of more than $60,000 in 2020 (total of 2Q, 3Q and 4Q) the IRS sent a proposed adjustment for the indicated “excess” – a very straight forward process on the part of the IRS.

Also, we have seen very few refunds issued over the past four months, so the backlog is growing. With the start of 2023 regular tax season at the IRS, in addition to the backlog, we anticipate increases in the refund cycle times.

As we have seen some errors in processing by the IRS, it is important to follow up if you believe the IRS has underpaid your claim. For example, you may be underpaid for failure to include the “non-refundable” portion of the claim, which is actually refundable if you initially paid the total payroll tax.

We have also had indications of claims that have been disallowed by the IRS. However, the employer was never notified and the only way we determined this was a phone call to the IRS. The outcome of such a call is not exactly informative, but we have learned that the claim was disallowed with no explanation or communication.  This places an increased emphasis to follow up on 2020 claims.

Separately, for employers who believe they were paid (overpaid) improperly, the IRS has also issued comments for employers who want to withdraw their as-of-yet unprocessed claim and opt for a voluntary disclosure procedure.

At PBO Advisory, one of the key aspects of our ERC/ERTC claims support is to ensure employers understand the basis for their eligibility. As such, we have not received any client requests related to a withdraw or voluntary disclosure.

If you’d like to read the full IRS update to the Senate Finance Committee, click here

Jennifer Rebis