IRS to reject billions of dollars in ‘improper’ pandemic-era small business tax credit claims

The IRS will deny billions of dollars’ worth of claims for a pandemic-era tax break while working to process lower-risk filings, the agency said on Thursday afternoon.

Enacted to support small businesses during the Covid-19 pandemic, the employee retention credit, or ERC, is worth thousands of dollars per eligible employee. However, the agency stopped processing new filings in September amid a surge of “questionable claims,” the IRS said in a news release.

The agency added that it will extend that moratorium.  

After investigating more than 1 million claims worth roughly $86 billion, the IRS said in the release that it identified 10% to 20% of the highest-risk filings, and “tens of thousands” will be rejected in the coming weeks, according to the agency. Another 60% to 70% of claims with an “unacceptable level of risk” will be further examined, the IRS said.

“We will now use this information to deny billions of dollars in clearly improper claims and begin additional work to issue payments to help taxpayers without any red flags on their claims,” IRS Commissioner Danny Werfel said in a statement.

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During the ERC review period, the agency processed 28,000 claims received before September 2023 worth $2.2 billion and disallowed more than 14,000 claims worth $1 billion, according to the release.

Overall, compliance efforts for erroneous ERC claims have topped more than $2 billion since last fall, the IRS said.

“This is one of the most complex credits the IRS has administered, and we continue to ask taxpayers for patience as we unravel this complex process,” Werfel said. “Ultimately, this period will help us protect taxpayers against improper payouts that flooded the system and get checks to those truly eligible.”

With more than 1.4 million unprocessed ERC claims and many “questionable” filings, the IRS urges taxpayers with pending ERC claims to consider the agency’s withdrawal program. 

There’s still time to withdraw a claim if you haven’t received a payment for any tax period. If you received a check but haven’t cashed or deposited it, you can use this program to return it.

If eligible, the IRS will undo the original ERC claim and no penalties or interest will apply.

“It’s a mulligan moment” because you can still fix ERC mistakes before the IRS catches them, Dean Zerbe, national managing director at Alliantgroup, previously told CNBC.