Recent IRS ERC Update May Increase Necessity of Refund Lawsuits

The IRS's recent Employee Retention Credit (ERC) update is expected to lead to a significant increase in denied claims, with tens of thousands of businesses facing potential denial of billions of dollars in refunds. The update introduces a risk-based categorization system, with high-risk claims most likely to be denied due to errors. As a result, refund lawsuits may become a more likely necessity for businesses seeking to recover their denied claims. To navigate this complex process, businesses must understand the new risk categories, processing delays, and the importance of professional guidance - essential knowledge for safeguarding their ERC claims.

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Key Takeaways

The IRS is targeting "risky" ERC claims for denial, with tens of thousands of claims expected to be denied, potentially totaling billions.
High-risk claims are most likely to be denied due to clear errors, while medium-risk claims will undergo further analysis to expedite valid claims.
The lengthy processing timeline is anticipated, with first low-risk payments expected in summer 2024, and taxpayers are advised to await notifications regarding claim status.
Taxpayers whose claims are denied may need to consider litigation to challenge denials, with refund lawsuits possible as indicated by government court filings.
Consulting tax professionals or attorneys experienced in litigation is crucial for understanding procedures and timelines for filing refund lawsuits and preparing for costs and time commitments.

Understanding the IRS ERC Update

The IRS has cracked down on Employee Retention Credit (ERC) claims, announcing that a significant number will be denied due to the identification of "risky" claims. This move comes after the agency implemented a risk-based approach to categorize claims into high, medium, and low risk. According to IRS Commissioner Danny Werfel, tens of thousands of claims are expected to be denied, potentially totaling billions in denied claims. The agency has gained new insights into improper claim activities, prompting increased vigilance. As a result, taxpayers can expect a lengthy processing timeline, with the first payments from low-risk categories anticipated later in summer 2024. The IRS cautions against expecting rapid processing similar to summer 2023, advising taxpayers to await further notifications regarding their claims.

ERC Claim Denials on the Rise

Rising concerns over improper claims have led to a significant increase in ERC claim denials, with tens of thousands of claims expected to be rejected by the IRS. This development has taxpayers and tax professionals alike taking notice.

Key indicators of the escalating denial rate include:

The IRS has identified tens of thousands of claims that are expected to be denied, potentially totaling billions in denied claims.
Risk-based approach implemented to categorize claims into high, medium, and low risk, with high-risk claims being the most likely to be denied.
Clear errors in claims have prompted increased vigilance and scrutiny by the IRS.
Medium-risk analysis aims to expedite valid claims while preventing improper payments.

New Risk Categories Explained

Categorization of ERC claims has taken center stage in the IRS's efforts to scrutinize and process claims. The IRS has implemented a risk-based approach, categorizing claims into high, medium, and low risk. This approach aims to expedite valid claims while preventing improper payments.

Risk Category	Description
High-Risk	10-20% of claims, likely to be denied due to clear errors
Medium-Risk	60-70% of claims, requiring further analysis and information gathering
Low-Risk	10-20% of claims, expected to process without eligibility warning signs
High-Risk Identification	Claims falling outside congressional guidelines

The IRS has identified tens of thousands of high-risk claims, which are likely to be denied. Medium-risk claims will undergo further analysis to verify eligibility. Employers and taxpayers must understand these risk categories to navigate the ERC claims process effectively.

Processing Delays Expected Ahead

IRS officials are bracing taxpayers for a lengthy wait as they work through a massive backlog of ERC claims. The processing timeline will be slower compared to previous years, with the IRS warning against expecting rapid payments like those seen in summer 2023.

Factors contributing to the delay include:

Increased scrutiny to prevent improper payments
Categorization of claims into high, medium, and low risk
Review of tens of thousands of claims expected to be denied
Implementation of a risk-based approach to claim processing

The first payments from low-risk category claims are expected later in summer 2024, but taxpayers are advised to await further notifications from the IRS regarding their claims, as the increased scrutiny slows down the overall processing pace of ERC claims.

Importance of Professional Guidance

As taxpayers maneuver the complexities of ERC claims, consulting a trusted tax professional is essential to confirm eligibility requirements are thoroughly reviewed and accurate submissions are made. The IRS emphasizes the importance of compliance to safeguard against future denials, and a professional can help guarantee this. Taxpayers are warned against opportunistic advisors aiming to exploit them, highlighting the need for careful selection of a trusted advisor. A professional's guidance can help avoid improper claims, which may be denied, and confirm that valid claims are submitted correctly. By seeking professional help, taxpayers can minimize the risk of denial and potential future litigation, making it a significant step in the ERC claim process. This expertise is critical in maneuvering the ERC claims process effectively.

Ensuring Compliance With ERC Rules

Building on the importance of professional guidance in the ERC claims process, guaranteeing compliance with ERC rules becomes the next critical step. To avoid claim denials, employers and taxpayers must guarantee they adhere to all eligibility requirements. The IRS emphasizes the need for thorough reviews to prevent improper claims and potential future denials.

Key aspects of guaranteeing compliance include:

Reviewing and understanding congressional guidelines for ERC eligibility
Guaranteeing accurate and complete submission of required documentation
Being cautious of advisors seeking to exploit taxpayers with false promises
Conducting ongoing monitoring of ERC claims processing and updates from the IRS

Challenging Denied ERC Claims

With tens of thousands of ERC claims expected to be denied, employers and taxpayers are bracing themselves for a potentially lengthy and contentious process of challenging those denials. The IRS has implemented a risk-based approach to categorize claims, with high-risk claims likely to be denied due to clear errors. Valid claims facing denial may necessitate litigation to challenge IRS decisions. Taxpayers can file refund lawsuits, as indicated by the government's stance in recent court filings. The case of Stenson Tamaddon, LLC v. IRS highlights ongoing legal considerations. Employers and taxpayers must be aware of their legal options to recover denied claims. The process of challenging denied claims will require thorough documentation and a clear understanding of ERC rules and regulations to successfully navigate the appeals process.

Navigating Refund Lawsuit Options

Employers and taxpayers facing denied ERC claims must navigate the complex process of refund lawsuits to recover their rightful benefits. The IRS's increased scrutiny of ERC claims has led to a significant number of denials, prompting the need for litigation. To navigate refund lawsuit options effectively, taxpayers should consider the following:

Review the IRS's basis for denial to identify potential grounds for appeal
Consult with a tax professional or attorney experienced in tax litigation to assess the strength of their case
Understand the procedures and timelines for filing a refund lawsuit in federal court
Prepare for potential costs and time commitments associated with pursuing a refund lawsuit, including discovery, motions, and trial proceedings.

Frequently Asked Questions

What Is the Total Number of ERC Claims Denied by the IRS so Far?

The IRS has denied tens of thousands of ERC claims, with the exact number not publicly disclosed, but potentially totaling billions in denied claims, as it implements a risk-based approach to scrutinize claims.

Can Denied ERC Claims Be Resubmitted for Reevaluation by the Irs?

She can't resubmit denied ERC claims for reevaluation by the IRS; instead, she must follow the formal appeals process or consider filing a refund lawsuit to challenge the IRS's decision and recover the denied refund.

Are There Any Penalties for Employers With Denied ERC Claims?

Employers with denied ERC claims may face penalties if the IRS determines they willfully filed false claims or intentionally failed to follow claim procedures, but most denials won't result in penalties, only a loss of refund.

How Do ERC Claim Denials Impact Small Businesses Versus Large Corporations?

Small businesses are more vulnerable to ERC claim denials as they often lack the financial resources to absorb losses, whereas large corporations can better withstand denials, but both face potential financial strain and costly refund lawsuits.

Are There Any Alternative Relief Options for Denied ERC Claim Applicants?

She explores alternative relief options, such as refund lawsuits, for denied ERC claim applicants, considering the IRS's scrutiny and denial of claims; consulting a tax professional is essential for managing these complexities and potential litigation.