Unraveling the IRS's ERC processing path

If you're advising businesses on their pending ERC claims, this is a must-listen for practical guidance on navigating the process and setting the right expectations.

 

Tune in to hear Chris Wittich and Dan Chodan, two experts immersed in Employee Retention Credit (ERC) matters for four years, discuss the IRS's upcoming actions for sorting and processing pending ERC claims by risk level. High-risk claims are likely to be denied, medium-risk claims require more detailed review, and low-risk claims will be processed starting soon. The IRS moratorium on processing claims filed after September 14, 2023, is still in place.

 

Businesses with pending ERC claims are facing critical choices about amending income tax returns due to statute limitations. The speakers advise open communication with clients about the limited options available and the importance of understanding the ethical responsibilities as tax preparers. Based on the current backlog at the IRS for ERC claims, it is important to manage client’s expectations around the processing time as the impact of potential changes in legislation.

 

Related resources 

Previous Tax Section Odyssey episodes discussing the Employee Retention Credit (ERC):

·       Sifting through ERC questions | Tax Section Odyssey

·       ERC suspended: What happens next | Tax Section Odyssey

·       Employee retention credit and professional responsibilities | Tax Section Odyssey

ERC guidance and resources — The rules to be eligible to take this refundable payroll tax credit are complex. This AICPA resource library will help you understand both the retroactive 2020 credit and the 2021 credit.

Employee Retention Credit (ERC): Fact or Fiction? — Use this guide to educate yourself and others on common misconceptions surrounding the ERC.

Employee Retention Credit Decision Tree — Download the ERC decision tree to help you with various decision points when working with clients to protect yourself/your firm from significant risk.

 

IRS resources

 

·       IR-2024-169 — IRS news release on June 20, 2024, discussing the next stage of ERC work

·       IR-2023-169 — IRS news release on Sept. 14, 2023, ordering the immediate stop to new ERC claim processing.

·       IRS ERC resource center — IRS hub for ERC information, including links to guidance, FAQs and the latest news.

 

Transcript

April Walker: On today's podcast, we're going to talk about the IRS's next steps for ERC and what that means for you.

Hello everyone, and welcome to the AICPA's Tax Section, Odyssey podcast, where we offer thought leadership on all things tax facing the profession. I'm April Walker, a lead manager from the Tax Section, and I'm here today with two repeat guests. I'm happy to have with me, Chris Wittich. He is also known as @ravenoustiger. He is a partner at Boyum Barenscheer in Minnesota. I'm also delighted to have Dan Chodan. Dan is a tax partner at Trout CPA in Pennsylvania. Welcome to the both of you.

Dan Chodan: Thanks for having us.

April Walker: Chris, let's set the stage for what we know now. We're recording on July 2. [Let’s talk about] what we recently heard from the IRS late last week and what we know now about the IRS processing of claims or what they're telling us.

Chris Wittich: On June 20th, IRS had a press release, and there was a lot of good information in there, the first time in quite awhile. I think we've gotten some insight as to what they're doing with these ERC claims. Right off the bat, they differentiate, and they say they're putting claims in three different buckets, and it certainly falls in the red, yellow and green.

In my mind, the red category, the IRS is saying between 10-20% of the claims fall into what they describe as the highest risk group. They've said that a lot of these are going to be just straight-up denied in the coming weeks, so that red they're just seeing these claims. They're looking at them. They're saying these are not good claims at all. I would suspect those are like the employees don't exist, the businesses don't exist. They're claiming more in credits than they paid in wages, stuff like that. The IRS is saying 10-20% of all the claims they have, I would expect to get adjusted or denied entirely, and they're going to start working on that soon.

The next category is the biggest category, and that's the yellow, as I would describe it. So they're saying between 60 and 70% of claims show an unacceptable level of risk. That's their term, not mine. That's two-thirds of the claims. They think the risk is so high that it's unacceptable and we're not exactly sure what factors they're using to determine that, but in their own words, they're going to be doing more thorough reviews, compliance reviews of those claims. Which again, that's the vast majority of the claims.

The third category is a green zone. They're saying between 10 and 20% of the claims show a low-risk, and they don't say how they determined it, but you can reasonably assume that the claims are well within the payroll metrics. They might be particularly at-risk industries. A restaurant is likely to be a lower risk claim than a law firm. Based on industry or the size of the claim, or the number of quarters, they're saying, well, 10-20% of these look like they're going to be good claims, and so they intend to start processing them. It remains to be seen how quickly they really process the claims, but at least they're acknowledging that a portion of these are good claims and we're going to start getting them out.

For those three buckets, the other caveat here is those are the claims filed prior to the moratorium. They haven't looked at the claims filed after the moratorium. So, those three buckets, those are just the claims they had prior to September 2023.

April Walker: It's important to note, because we get this question quite a bit, the moratorium means they are not processing those claims. It does not mean that they're not accepting them. If you feel you have a good claim. We're going to get more into the statute discussion a little bit later. [I’m really not talking specifially] about statute on income tax return, but there's also a statute issue with the ERC claim itself. Again, we'll talk about how you're talking to your client about the [statutes], but the moratorium does not mean you cannot file, it just means they are not processing.

Chris Wittich: The moratorium. I always explain it to clients, like you can send in your claim. The IRS will take your claim and put it on a shelf, and they promise that someday in the future they will start looking at the stuff on the shelf, and they haven't done that yet. If you have a good claim submit it, it goes on the shelf, the IRS will get to it down the road.

April Walker: That's what the IRS told us, which is important to set the stage. Chris, based on this information from the IRS, what advice are you giving to businesses who are waiting? I guess there are the buckets – from what the IRS said. There's also buckets of where people are in this claim process. Walk us through a little bit about how you're sharing with your clients about expectations, I think is an important word.

Chris Wittich: So for the people who filed prior to the moratorium, and we have lots of people we helped in the summer of 2023, very few, if any, of them have seen actual checks or credits getting processed. I think now what we can tell people is the IRS is going to start processing those. If you filed in the summer of 2023 and you're a low-risk claim, I would expect or hope to get processing in the next six months.

For those people, I am saying, hey, it's been slow. It's been maybe 12 months and you haven't seen anything, but we're very hopeful that you will get processed before the end of the year. For the people who filed during the moratorium, and certainly we've had a bunch of those. Originally we didn't know how long the moratorium would last. Maybe it was only going to be a couple of months.

My advice to them now is that I fully expect the moratorium to last until April of 2025. I think if you read in-between the lines of what the IRS is saying, this moratorium is going nowhere anytime soon. If you filed in October 2023, just after the moratorium, I'm telling them, hey, that claim is likely to sit on the shelf at the IRS until April 2025, then they're going to process them in the order they were received.

Late 2025 or sometime in 2026 is my realistic expectation for when those claims will get processed. For the people who are questioning their claims, I would remind them that the withdrawal process is still available, it's still open. You can also just file a regular amended payroll tax return to undo or modify or payback your portion of a claim, if you think it is no longer a claim you want to make.

Then for people who have potentially made bad claims, I would say the IRS has hinted at a second voluntary disclosure program (VDP). It's not out yet. When it comes out, the terms won't be as generous as the first time around, but there's a decent chance that a second voluntary disclosure is coming down the road so that's how I look at it. You got the good claims from before the moratorium, the good claims during the moratorium and then you've got withdrawal, regular amendment and voluntary disclosure as the options to deal with bad claims.

Dan Chodan: If I can jump in there about the VDP. I think the comment has been that they were going to make that decision pretty soon. I think this month so that we should hear something on that. Anybody that might be thinking about doing it, I'd say at least hold off through the summer before making those decisions because it sounds very likely that they're going to come at least come out with something or say that they're not.

One way or another, I think the IRS already hinted at that, but you bring up a really good point there Chris, and the IRS said it in this release. They are really concerned about lifting the moratorium and what that would do for the next wave of promoters, pushing for another gold rush, I think is the term that's used there.

That's really the big push of the moratorium itself. To shock the system of the outfits that were doing heavy promotion. I think it's been largely successful. You got to give the IRS credit. They can't necessarily deal with a significant volume that was out there. It went from 50-60,000 claims a week. You're recently looking like closer to 12k a week that they are receiving. And that's because of this moratorium and then because you can't file 2020 claims anymore.

Because after the bill with the January 31st cutoff potentially was out there, that really caused a push, for a lot of reasons, but the moratorium being the primary one. And just to reiterate what you said with that in mind, the IRS saying they want to responsibly lift the moratorium, and that absolutely means it's not going to be before there'll be any chance that funds would go out and be used for further promotion. They've said that explicitly in this. Those hoping that it would have been through the end of '23, what the first timeline could have been and it'd be lifted soon.

It's certainly dragged on of course, till now and I expect that it's going to at least double in time here through next year, if not more. While they try to get Congress to act, they want Congress to pass that ERC provision that was in that bill, that didn't make it to law yet. But they want that passed in standalone or tucked into something else.

That's what IRS is lobbying for. It's certainly interesting, but I am maybe a little more pessimistic on the timeline. Six months, I'd love to see something happening. But I've been telling people we're in uncharted waters and we have seen some processing. It's been a trickle during the moratorium of the pre moratorium claims getting paid. I think there's a lot in this release, but that's basically going to continue. What we've seen is the same as what it's going to be going forward. It's going to be a very slow rate and it's a very small amount.

But we are saying that most all of these claims have a very high risk of being improper and the low-risk claisorryms are so small. How do you know which bucket they've put you into? You just can't expect anything. What I'm telling clients is do what the IRS is telling you to do here. You've got to wait and don't expect anything, don't spend this money in advance. If you do have a hardship case, it's been over a year. Those are the taxpayer advocate cases that can be filed and there's been success there. We've seen that for those funds that have sat around for a long time, but if it's a true hardship case that can be made, still don't consider that a guarantee, but at least you can make those cases through taxpayer advocate.

That's an action that can be taken, but for those that can't make the hardship cases, it's a sit around, waiting game for very large claims that are solid. Refund litigation is part of the conversation too through the court proceedings there, but not something that the average taxpayer would be considering. Just due to the costs and the timeline and there is scrutiny to that. It isn't going to be all claims, it's just going to be the best ones and the biggest ones and those willing to fight that process. No guarantee that it will mean it's a faster process than if you had left yourself from the traditional route. Those are just the conversations around what are we doing at this point. Just to add some more color to that plan.

April Walker: That's great. Dan, Thanks. I was just thinking as you were talking. Again, we do not know anything about whether this is true or not, but truly, if they push the moratorium until next spring of 2025, maybe I just had a light bulb moment, That will be the end of when 2021 claims can be filed. But I guess even more important, if there is a legitimate claim, back to our original point, can still be filed. They're put on that proverbial shelf that Chris is talking about, but it sounds and they certainly alluded to that opening up the moratorium seems like an opportunity.

Dan Chodan: We should mention April [15 deadline] there. I always have to layer that with a lot of caution at this stage because that January 31st date could stick at some point. While I would say you can file them today, there's no guarantee. If the messaging continues the way that it's going, it could be another date. It could be any date. It could stick with January 31st. All these claims on the moratorium, have been sitting on the shelf. It could go all the way back to the beginning of the moratorium. that's more revenue for them in Congress to go spend somewhere else. It's not to say that you don't file if you have a legitimate claim, but you just have to be aware that there's absolutely a risk at play that this could be changed and could be changed retroactively to make sure we highlight that.

April Walker: Great point and things you need to be talking about with your clients as you're thinking about it as a business yourself filing this claim.

I want to talk about any experiences you've had, just in general, with not necessarily the processes and the claims, but thinking about have you had a lot of [IRS] examination communication. What's your experience been with your current claims that you have in the hopper?

Chris Wittich: I've seen just a wide variety, I would say, of issues or notices related to these. Certainly, had a couple of audits, but still that's a small number. We have other issues where four of the quarters got processed, but not the other two. You call the IRS, try figure out what happened, and you get the runaround, you just can't get a straight answer.

We've had notices where the IRS denies the claim because they say you didn't pay any wages, only to discover that, yes, of course, they paid wages, but the IRS lost all the payroll tax documentation; they don't have the W-2s, a lot of little one-off issues, I would say that are all over the place and it has to do with these things. A lot of these things were filed on paper, the records aren't necessarily that great.

I'm sure that I have clients in what they think is the highest risk category, and they're there because they lost the W-2s, and so they think a client made a claim of $100,000, but don't have a single person on payroll. But yes, they do have people on payroll, we have all the payroll tax reports, we have all the proofs that W-2s were issued. IRS just isn't matching that up, necessarily. Just lots of issues, but they're all over the place. I haven't seen anything, at least recently that's been very systemic or consistent.

My advice is always trying to confirm that the IRS has your claims. Certainly, certified mail was a good way to do that, but some clients didn't do that, so you can call the IRS and at least confirm that they received it and then deal with those one-off issues as they come.

April Walker: Are you doing that on the PPS line?

Chris Wittich: Yeah. We've used the PPS line for the most part, you certainly need a power of attorney to do that. Some clients just call themselves and they're calling the regular IRS line, that's so hit or miss, as to what kind of service you're going to get, but it's available just to call and confirm that they have it.

April Walker: We do get that question a decent amount. Dan, do you have any thoughts to share?

Dan Chodan: Sure. Yeah, I'd add to that. Once you have that power of attorney, you can get the 941 transcripts. It's going to give you the same information as a phone call, they'll tell you the date received, and once it's paid, otherwise, no updates in the process, which is just mind-boggling, of course, when he tried to explain that to a taxpayer that wow, how do I not know the status?

Unfortunately, everybody's in the same boat, all we can do is prove receipt and then show when the payments are made, and those transcripts are great. As far as what I've been seeing, I've seen it all across the board just as Chris has mentioned here, there's inconsistency as I talk to other professionals, the enforcement of this is all over the map, some have moved very quickly, some really drag on, some agents are very well-versed in the process, some are missing things that are needing to be explained the rules, may be and helped through the process is a wide breath in that and what's going on, but it doesn't seem to be in a large volume.

There's a team that's doing these in examinations and the processing is at a trickle, it's not a large group, and neither of those areas. Something's going to have to change going forward while the IRS puts more resources behind enforcement. Will there be a larger enforcement window authorized by Congress that's being asked for in these bills? Now at some point, the rate of processing has to pick up or it's just going to take years and years for the backlog to be cleared on all these things.

There's more to come on what's going to happen, but again, is it to expect some seismic the change in the next six months or even to a year, it's probably not it, but there'll be some change on that front. There has to be given the IRS rhetoric around enforcement and then also just there will be more of a ground swell eventually that we have to do something with all these claims sitting on a shelf.

April Walker: I'd like to pivot a little bit to another big question we get all the time, and this is the segment I'd like to call There are no good answers to these questions". I want to talk about them [though] and let's walk through where you guys stand with them.

So statute of limitations and income tax returns. Lots of concerns here, especially as we talked about with all the delays. With delays of running out of statute for these income tax returns where either amended returns have already happened or need to happen.

Let's break it down a little bit. There are businesses who haven't received their refunds, their claim has not been processed. You have told them. I know the two of you have told them, no question, they need to amend their income tax return for the period of the ERC claim, and statutes either have already run or getting ready to run. Chris, talk a little bit about talking points here. What you're talking with your clients about, trying to help them understand where they are with this.

Chris Wittich: Yeah, there's definitely no good answers, and I think just being honest with the clients and telling them that upfront. The biggest thing is to discuss it with them, make sure they're aware, and then let them choose which bad choice they want to make.

But the timing of the income tax statutes, they are going to close, and especially with this recent announcement, we basically know that these moratorium claims are not going to get processed before the statute closes, lots of claims or high risk, so they're not as likely to get processed before these statutes close.

A lot of the 2020 statutes are probably already closed, 2021 will go next year. A lot of the time you're left with a choice which is pay tax, which you simply cannot afford to pay because you have not received the money, or let the statute run and potentially do it after the statute, which is not a good feeling, and neither of those is attractive.

The third common scenario is I paid my tax already, but now my claim has been sitting for 18 months and I'm worried I'm not going to get all of it. So do I push back to those same two options again, do I amend now to take the income back out? And I'm left with the same two choices of when to pay the tax or to do it late, or do I look at some protective claim to hopefully protect me if the IRS adjusts my claim down, then I want to be able to get a refund of the income taxes, which I've already paid.

I think all of those scenarios are lousy choices for a taxpayer to make. I see my role is just making sure they know all of the lousy choices available to them, and it's going to depend on their financial situation. Sometimes you simply cannot afford to pay the tax, that's just not a choice, if I'm going go bankrupt by paying the tax, I guess we're not choosing that option. So making them aware.

I think it would certainly be a consideration as to how high a risk a claim do you think they have. Some claims are based on gross receipts decline that's very obvious, and all the calculations are done correctly. Other claims are based on government orders and trying to figure out what a more than nominal impact is, and there's some question as to maybe a grouping or something like that.

Some claims are inherently going to seem like they're higher risk and making sure the clients are aware of that, and then just letting them go with one of these lousy options. I wish I had something better to tell them. It's kind of a depressing conversation to have with people, but it's one that you don't want to avoid because that is the worst outcome. Because if you don't talk to them about it.

Dan Chodan: We can't avoid it, we need to make the recommendation to the client. Here's what the rules are, you've made the claim, here's what it is. We have to advise the rules, but we can't force someone to amend either, we have to meet our duty in that and there's the reality of their situations that will come into play and their decision. But we have to do our end of things.

What will be interesting is the proposed bill that was out there to change some things on the ERC would align the income tax statute with the enforcement. There could be relief on some of this for the ones that get thrown out later, may at least not have that double whammy of inability to get the income tax back, so there may be some relief for those bad cases at some point.

But right now, before these statutes run, 2020, maybe closed, 21 is still open for sure. Those ones that could be risky, I'd have those conversations. Also on our end, if we know clients that have a shaky one, they may be in a position where they don't want to wonder what Congress will do in the future, will they give us this relief or not? They may look to get that cash back on the income tax side now and then redo this in the future as needed. But at least you can lock in if you know that you're in a really sticky spot, so that's something to consider.

April Walker: I told you that this was the section of no-good news and that's not generally how I roll. I generally like to provide bright light and positivity, but this is a tough one.

But I think this is where you need to show that you're an advisor and show your value even if you're coming with not a lot of great news. All right, as we're wrapping up, let's see, I'll start with you, Dan. Is there any final thoughts or takeaways that you'd like to leave our listeners with today?

Dan Chodan: Sure. This is a very interesting release that pushed us to have this conversation today. I think it's very telling, but also at the end of the day, we're in the same spot. The IRS has the situation where it wants it. The advertisements have disappeared. The deluge of claims is way less. It's not that they're without problems, but the IRS has been immensely successful on this already, so you got to give them some credit.

This release gives us a lot of information, but when you look at it, it means what we've been experiencing is probably going to continue. We're probably going to get another doubling of the experience we've had to this point. The fact that they say the vast majority of these show risk of being inproper just really supports what has been seen, what they've been worried about all along, and is also just echoed in the compliance efforts.

They said two billion dollars to date in compliance through the VDP, through withdrawal and enforcement efforts. That's a huge number. Not a huge number to the total of the program. But when you think about, that means that's what's been accomplished so far, so how much more is out there if that's what has been withdrawn, if that's what has been enforced to date, even with limited resources and small amount of audits there's a much bigger pool and it speaks to the fear and the risks that's out there.

A lot more to come. If there's no congressional action at all related to this program and everything just stays as is going forward, I'd be surprised. Something's going to happen in some form, even if it's not exactly what was out there in the last proposed bill. I feel like this is going to come in some way, shape, or form in the next couple of years, and the IRS will have more releases. There'll be more twists and turns on this.

More to come, unfortunately though, for those that aren't in a spot to get a taxpayer advocate referral and have a hardship claim to push this. I think you're just along for the ride until you're in that real need, unless you're going to go that refund litigation route, you're just going to have to be along for the ride here, unfortunately. A lot of other tough conversations we've been having for a while now are just going to be continuing, that we're going to have to wait and see.

April Walker: Thanks, Dan. All right. Chris, what's your send-off thoughts for us?

Chris Wittich: I would agree with everything Dan said. I guess I would just wrap it all the way back to the discussion that we had in April of 2023. I'd encourage you to circle back. In April 2023, we talked about the IRS OPR announcement. We talked through the Circular 230 issues, the SSTS issues, what are the ethical responsibilities of a tax preparer of a CPA. I would cross-reference those conversations with where we're at today.

You want to advise your client of the rules. You want to be sure you know what the IRS is saying currently. But I would cross-reference, we got this new press release, there's some new information in there. They're clearly targeting these bad claims, so what do we do about the bad claims? There's a few solutions available now, but I also need to understand my ethical responsibility. I'm sure it'll be linked, but I would go back and take a listen to that with this new press release in top of mind.

April Walker: Yes. That is exactly right. That's when we were together last to record talking about that, and none of that conversation is out of date. We're in a different place with claims, but all of that conversation is very relevant.

Now, you're not going to get out of my fun question. Even though you've been with me before, you still have to answer these questions. I like to think about us taking a journey together towards a better profession. Always journeying toward that. Chris, what journeys are you taking outside of tax? I think you're getting ready a month or so to have baby number 2. I don't want to put words in your mouth. Where are you headed this summer?

Chris Wittich: With a baby on the way, travel plans are limited. These days our travel plans consist of going to grandma's house or going to the other grandma's house. About 20 minutes in either direction is our maximum travel distance, but excited too. I'll be at National Tax in November. I'll be in DC.

April Walker: That's fun travel, and there'll be some good hotel sleeping for the tiger. Dan, you don't have the tiny little ones running around, so hopefully you got some fun travel on the agenda.

Dan Chodan: We're going to get them back to the beach this summer. They'll be really excited for that. But my favorite travel this year was a bucket list item for my wife. It was our 10-year anniversary. She always wanted to go to Nashville. Big country music fan. That was a great time. We did that. Just got back. I'll admit country music isn't all that bad after being steeped in a little more of it, so I'm coming along to it.

April Walker: Okay. It's not it's not my favorite either, but Nashville is quite a fun town, so glad you were. And that was a without-kids trip?

Dan Chodan: Yeah.

April Walker: Those are always the best. Love the kids. Love them. You all are great. But so nice to be having adulting trip. Chris, maybe one day.

Dan Chodan: Different kind of fun.

April Walker: Exactly. Thank you guys so much for sitting down with me. I think this was a great important conversation. In the next stage, I feel sure we're going to talk again, so look forward to that.

Again, this is April Walker from the AICPA Tax Section. This community is your go-to source for technical guidance and resources designed especially for CPA tax practitioners like you in mind. This is a podcast from AICPA and CIMA together as the Association of International Certified Professional Accountants. You can find us wherever you listen to your podcast and we encourage you to follow us so you don't miss an episode. If you already follow us, thank you so much and please feel free to share with a like-minded friend. You can also find us at aicpa-cima.com/tax, and find our other episodes, as well as resources mentioned in this episode as well as linked back to other podcast episodes as we discussed. Thank you so much for listening and stay cool everybody.

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