Last month, the Internal Revenue Service (IRS) announced an extension of the suspension of processing Employee Retention Credit (ERC) applications filed after September 14, 2023. The agency closely reviewed backlogged ERC applications and found that 10-20% of applications were low risk, 60-70% of applications were unacceptable risk, and 10-20% were high risk. I applaud the IRS’s prudent use of increased Inflation Reduction Act funds to sift through invalid applications, identify low-risk applications, and conduct timely analysis of millions of ERC applications.
The IRS has announced that it will “begin the prudent processing of additional” low-risk applications, with the first payments expected to be made over the summer. However, the already identified low-risk ERC applications submitted by struggling small businesses should be approved and disbursed now. Immediate approval and disbursement of the low-risk ERC applications would greatly benefit the approximately 150,000 to 300,000 applicants still operating in a difficult economic environment.
It is important to understand the context of why implementing the ERC has been difficult for both the service and taxpayers. Before the COVID-19 pandemic, Congress established the ERC after Hurricane Katrina and several other natural disasters. In those cases, the ERC was locally targeted to the affected areas. COVID-19 was the first time the ERC was applied nationwide.
In addition, after passing the first CARES Act package, Congress changed the eligibility requirements for the ERC benefit. The taxpayer confusion caused by the eligibility changes, combined with the focus on the Paycheck Protection Program (PPP) and the Economic Injury Disaster Loan Program (EIDL), led Congress to extend the filing deadline for amended ERC claims.
Like the PPP, the ERC grant provided incentives for businesses to keep their employees on and, in many cases, also supported the cost of health insurance benefits. However, unlike the PPP funds, which were approved, the ERC provided financial assistance by reimbursing employers for taxes they had already paid. The employers who claimed ERC benefits kept their employees despite suffering large operating losses because they were promised that the government would help them get back on their feet. Years later, too many businesses are waiting for the government to make good on that promise.
Policy changes were not the only obstacle for small businesses seeking to apply for ERC. Compliance with changing and complicated public health regulations, labor shortages, and other challenges caused the ERC to slip from the sights of some business owners. It was only when many saw their competitors apply for and receive ERC funds that they realized they themselves were eligible.
It’s true that the fog of war and the predatory schemes of some bad actors have misled some small businesses into thinking they were eligible for ERC when they weren’t. That’s why the IRS’s careful work in distinguishing between high-risk, unacceptable risk, and low-risk was so important. But fighting fraud shouldn’t come at the expense of legitimate small businesses with claims pending with the IRS.
Nearly every federal agency was mobilized to prevent economic collapse. I’m proud to say that the IRS largely answered that call. IRS employees processed 476 million Economic Impact Payments to households, submitted 4 million applications for disaster economic injury loans, and paid out over 2 million small business ERC claims.
Right now, the IRS has an opportunity to finish the great work it started during the pandemic. The first step is to finalize the legitimate claims it has identified.
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