Employee Retention Credit Claim Resolution Has No End in Sight

Despite former IRS Commissioner Danny Werfel’s pledge to resolve 500,000 employee retention credit claims by the end of 2024 and over another half million by the end of 2025, problems with the pandemic relief program are likely to stretch into 2026 and beyond.

That means hundreds of thousands of businesses’ ERC claims won’t be processed this year unless Congress acts or the IRS increases its processing rate.

The agency has a substantial ERC backlog, and slow processing times have many businesses waiting for legitimate refunds. The IRS moratorium on processing claims filed after Jan. 31, 2024, has businesses that filed claims after that date in limbo. The IRS Taxpayer Advocate Service criticized the continuation of the IRS moratorium and slow processing in its last annual report.

Werfel’s claims and the IRS’s ambitious ERC goals notwithstanding, the numbers simply don’t add up. As of Oct. 26, 2024, more than 1.2 million ERC claims remained unprocessed. That number may not include any claims filed after Jan. 31, 2024.

It also doesn’t account for any 2021 ERC claims filed after Oct. 26, 2024, and before the filing deadline on April 15, 2025. There are likely hundreds of thousands of both types of claims because ERC advisers continue to advertise the credit and encourage businesses to file for it.

Ending the ERC early could fund other legislative priorities, but there are ERC advocates on both sides of the political aisle and no imminent reform bill. The Tax Relief for American Families and Workers Act of 2024 would have set Jan 31, 2024, as the deadline to file ERC claims. It used the “tax savings” from ending the program early to pay for larger refundable child tax credits and extend 100% bonus depreciation for businesses.

The bill easily passed the House of Representatives with bipartisan support but never came up for vote in the Senate and expired on Jan. 3, at the end of the 118th Congress.

Ending the ERC program before April 15 won’t have nearly the impact of the previously proposed end date of Jan. 31, 2024, because the IRS will have to pay out valid claims filed after that date and before the new end date, reducing the tax savings available for other priorities. And it’s unclear whether retroactively terminating the program to a prior tax year would withstand a legal challenge.

The efforts of Werfel’s successor may be a better route to Werfel’s stated goal of processing all ERC claims this year. President Donald Trump nominated former Rep. Billy Long (R-Mo.), an ERC advocate who worked for two firms that promoted the credit, as IRS commissioner.

Previous IRS claims that most ERC claims raise red flags no longer appear accurate—even the Taxpayer Advocate believes the IRS overstated the percentage of fraudulent claims. And as a former ERC adviser, Long likely wouldn’t agree that the majority of ERC claims are fraudulent.

If confirmed, Long could change the IRS’s anti-ERC tone, remove hurdles to processing claims, and expedite ERC refunds. Long could greenlight the processing and payment of ERC claims, while allowing an increasingly defunded and understaffed IRS Examination Division to do the best it can to audit whatever claims remain open under the applicable statute of limitations for assessment.

While the Inflation Reduction Act provided the IRS with an additional $79.4 billion of supplemental funding, Congress later cut $40 billion from the IRS budget, leaving the IRS with less funds to hire auditors and investigate suspect claims.

On inauguration day, Trump signed executive orders instituting a federal hiring freeze and ending remote work in the federal government. These orders are already dramatically impacting staffing levels at the IRS, further complicating the agency’s efforts to review suspect claims and pay refunds.

In the meantime, dozens of businesses have filed federal lawsuits seeking faster resolutions to their outstanding claims. Anecdotally, refund litigation has been successful and efficient for some businesses.

The Department of Justice Tax Division reportedly settled suits for 100% of the ERC claimed plus interest (but excluding attorney fees) on well-documented claims and has done so in at least a few cases within months of the lawsuit filing. Refund litigation can be expensive, though, and businesses should understand that there is no guarantee of a quick and favorable settlement.

Almost five years after the ERC was created, businesses with legitimate claims still aren’t receiving timely refunds. The program cost ballooned to seven times its initial projection, and promoters continue to push fraudulent credits.

While many businesses that claimed the ERC will have their returns processed this year, unless the new IRS commissioner simply approves or orders payment for the outstanding claims, hundreds of thousands of taxpayers will likely have to wait until at least 2026.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Matthew D. Lee is partner at Fox Rothschild, focused on white-collar criminal defense and investigations, federal tax controversies, financial institution regulatory compliance, and complex civil litigation.

Brian C. Bernhardt is partner at Fox Rothschild, focused on federal tax controversies and arguing precedent-setting appeals in the state courts of North Carolina.

Jonathan M. Wasser is an associate at Fox Rothschild, focused on federal and state tax controversies.

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