The Employee Retention Credit (ERC) has been a critical financial support mechanism for businesses during the COVID-19 pandemic. This refundable tax credit was introduced to encourage employers to retain employees through periods of economic hardship caused by the pandemic. However, the program’s rollout has been complicated by eligibility challenges, fraudulent claims, and significant delays in processing refunds. This article provides an in-depth look at the current state of the ERC, the issues surrounding it, and recent updates from the Internal Revenue Service (IRS), including the introduction of a new consolidated claim process for third-party payers.
The ERC allowed eligible employers to claim refunds for retaining employees from March 12, 2020, through December 31, 2021. Eligibility criteria varied depending on the time period and included businesses that experienced government-mandated shutdowns, significant declines in gross receipts, or those qualifying as “recovery startup businesses” in 2021. Though the application period for 2020 claims has closed, businesses can still retroactively claim refunds for 2021 until April 15, 2025.
Despite its intent to provide relief, the ERC has been plagued by several issues. A substantial backlog of claims, fraud, and miscommunication have frustrated businesses that depended on timely refunds. As of late 2024, the IRS reported processing approximately 400,000 claims worth $10 billion, though the backlog once reached 1.4 million claims. This significant volume reflects not only legitimate applications but also a wave of improper claims fueled by aggressive marketing from unscrupulous promoters.
Problems with fraud had caused the IRS to stop the processing of new claims after January of 2024, however as of the Fall of 2024, they had renewed processing later claims, prioritizing obvious fraud cases and obvious legitimate claims, and deprioritizing the questionable ones that might require additional scrutiny.
A number of lawsuits have been filed against the IRS because of the delays, including interest and legal fees. As of now, we are not aware of any of these have been successful in forcing the IRS to pay. Some say that cases of this kind are more likely to force systemic changes than to increase the speed of action of a government institution.
Last summer, Mitt Romney and others had attempted to pass a bill to cancel the program. However, Trump’s choice for head of the IRS, Billy Long, has been a long-time proponent
One of the most notable updates to address these challenges is the IRS’s newly announced consolidated claim process for third-party payers. This initiative, introduced in late 2024, aims to accelerate the resolution of ERC claims filed by third-party payroll providers. These providers, who handle payroll and federal employment tax reporting for multiple clients, often submitted claims on behalf of numerous businesses. If a third-party payer’s client later determined that their ERC claim was ineligible, the claim needed to be corrected. Previously, this correction process was cumbersome, requiring individual adjustments for each client.
Under the consolidated claim process, third-party payers can now withdraw claims for ineligible clients while maintaining valid claims for those who qualify. This streamlined approach reduces administrative burdens and expedites the review process. “The IRS understands the vital importance of Employee Retention Credits payments for struggling small businesses,” said IRS Commissioner Danny Werfel. “We are continuing to make important progress on one of the most complex tax administration provisions we’ve ever had.”
This new process is particularly beneficial for businesses caught in the crossfire of fraudulent claims and eligibility confusion. Promoters often misrepresented the ERC as a grant or guaranteed payment, leading businesses to file incorrect claims. According to the IRS, “A significant number of the Employee Retention Credit claims came in during a period of aggressive marketing by promoters, leading to a large percentage of improper, ineligible claims.” The consolidated process not only helps legitimate businesses rectify these errors but also ensures that the IRS can focus on approving valid claims and addressing fraud.
The ERC program has faced other significant challenges, including lawsuits from businesses experiencing prolonged delays. For instance, The Job Center LLC, an Ohio-based staffing company, filed a lawsuit seeking $5.1 million in refunds, citing unjustified delays and a lack of communication from the IRS. Similarly, a North Carolina daycare, Miss Marta’s Inc., is pursuing $394,000 in owed refunds, alleging that the IRS’s delays have effectively suspended the program.
These legal actions highlight the frustration felt by businesses that relied on the ERC to stay afloat during the pandemic. The IRS acknowledges these concerns and has made efforts to improve its processes. However, challenges remain. Many claims require extensive manual review due to the program’s complex eligibility rules and the high volume of improper submissions. “The findings of the IRS review confirmed concerns raised by tax professionals and others that there was an extremely high rate of improper ERC claims in the current inventory of ERC claims,” the agency noted.
To address these issues, the IRS has intensified audits and investigations, particularly for claims related to the third quarter of 2021. For this period, the agency has five years to assess clawbacks instead of the standard three. Additionally, the Voluntary Disclosure Program (VDP), which ended in November 2024, allowed businesses to correct improper claims at a discounted rate and avoid penalties. The claim withdrawal program remains an option for businesses whose claims have not yet been paid.
As businesses navigate these complexities, the IRS advises employers to consult reputable tax professionals and review the ERC Eligibility Checklist. “Employers should be wary of ERC advertisements that advise them to ‘apply’ for money by claiming the ERC when they may not qualify,” the agency warned, emphasizing the risks of relying on misleading promoters.
Looking ahead, businesses must remain proactive in addressing their ERC claims. For those still awaiting refunds, patience and diligence are key. Employers should ensure their claims are well-documented and compliant with IRS guidelines to avoid audits or repayment demands. While the consolidated claim process marks a significant step forward, the road to resolving all ERC-related issues will require continued efforts from both the IRS and the business community.
The Employee Retention Credit has provided vital support to many businesses but has also revealed significant challenges in tax administration. The IRS’s introduction of the consolidated claim process demonstrates a commitment to improving efficiency and addressing taxpayer concerns. As the agency continues to process claims and refine its approach, businesses should stay informed, act responsibly, and seek expert guidance to navigate this evolving landscape.
FAM Editor: This was poorly planned and is thus a slow process. If Mr. Long does not find a way to speed it up, then many claimants could be waiting another 18 months.
