The IRS's efforts in the past year to clean up its employee retention credit (ERC) program have led some companies waiting for delayed payments to consider going to court, Bloomberg Tax reported.
Many firms expected to receive payments through the ERC program after staying open and keeping workers on the payroll during COVID-19.
ERC claims in the beginning came in more slowly than expected. However, claims eventually skyrocketed in the wake of pop-up firms enticing customers to claim the ERC even if they did not qualify.
Because of this surge in fraudulent claims, the IRS "went on offense" to manage the deluge and catch fraud. Last September, the IRS announced a moratorium on the processing of new claims. Last December, it began denying thousands of claims.
But some businesses with legitimate claims are still waiting for the credit or were wrongly denied it, Bloomberg Tax reported. More than a year after the IRS' first fraud-prevention initiatives, the crackdown is still not ending. Bloomberg Tax reported that such companies are now deciding on their next steps.
When the IRS stopped processing new claims in September 2023, it had received over 3.6 million claims since the program started in 2020, with 600,000 filed over the summer, Bloomberg Tax reported. During that time, tax professionals asked companies to continue to file for the credit and prepared to file a complaint if the agency did not take action within six months.
However, many businesses are still waiting for their refund a year later. As of June 17, the agency’s unprocessed ERC claims were 1.4 million. Some say the IRS’s delays and backlog made litigation the only alternative.
Among the lawsuits brought by companies against the IRS over ERC payments, there are two major issues. Some companies claim that the processing freeze violated federal rulemaking procedures, and some companies are seeking refunds for credits that they claim were improperly delayed or denied.
However, suing is expensive and might not be the best option if the credit isn’t large enough. The burden of proof also shifts, Bloomberg Tax said, necessitating that these businesses establish the facts that they are eligible for the credit.
According to Bloomberg Tax, some companies are starting to hear from the IRS as part of its latest series of letters not allowing the tax credit. However, the IRS stated that roughly 10% of these letters were sent in error. The further delay has resulted in tax professionals defending their clients’ eligibility for credit and considering either litigation or an appeal to the IRS.
The decision to proceed with an ERC claim has become more challenging, given that the IRS has been not been very transparent about sharing its criteria for denying the credits. Bloomberg Tax reported that the IRS does not want to give fraudsters a "blueprint" for avoiding enforcement or detailing the status of particular claims that are still in process.
Without IRS processing criteria, companies and their tax professionals have stated that they do not have much information to make decisions about their path, such as whether to file a lawsuit or participate in the agency’s voluntary disclosure program for improper ERC payouts.
Bloomberg Tax explained that the thousands of companies denied their tax credit can also file records lawsuits to obtain more information on why their claim was denied.
The bottom line is that thousands of companies are left to decide whether to sue or continue waiting.