IRS Releases ERC Moratorium Update

Last September, the IRS announced that it would begin a moratorium for processing any ERC refund claims filed on or after Sept. 14, 2023, to allow time to establish procedures to better vet claims to avoid improper payouts. Since that time, taxpayers have had limited visibility into the status of the moratorium and when it would end.

Finally, on June 20, the IRS made the first significant announcement since the moratorium began.

Key Highlights From the Moratorium Update

• The IRS has 1.4 million unprocessed refund claims, which it is grouping into three categories:

1. High-risk claims: Representing 10-20% of the backlog, the IRS will deny these claims in the coming weeks.
2. Low-risk claims: The IRS has identified 10-20% of the claims that represent a low level of risk. The IRS plans to begin processing the claims received prior to the moratorium later this summer. The IRS cautions, however, that the payments will go out slower than during the pandemic.
3. Moderate-risk claims: This group represents 60-70% of the claims where the IRS has determined they represent “an unacceptable level of risk.” These claims will go through further review as the IRS aims to improve compliance.

• The IRS plans to continue to process claims on a first-in first-out basis, and noted that no claims submitted during the moratorium will be processed at this time.
• The IRS is consulting with Congress to persuade them to take legislative action that would help enforcement. This could include ending the ability to make a refund claim – potentially retroactively – and extending the statute of limitations.
• The IRS is continuing to encourage taxpayers to take advantage of withdrawal programs.
• The IRS touted its voluntary withdrawal program, which recovered $2 billion, and their criminal investigations, which has identified $7 billion of potentially fraudulent claims.

What the Update Means for Taxpayers

The announcement confirmed what taxpayers and tax professionals had expected. The IRS has processed few claims since the moratorium was announced and has allowed its inventory of claims to grow substantially to 1.4 million including 880,000 that were filed before the moratorium began in September. The situation is frustrating for taxpayers as there is little that they can do to get an update on their claim.

It’s also unclear how the IRS has identified the groupings referenced above. The ERC refund claim was made on a Form 941-X, which had no specific questions about the ERC claim except if the taxpayer was a recovery start-up business (which applied to a fraction of the claims). With such little information, it’s unclear how the IRS would make such determinations.

What To Do If a Refund Has Not Yet Been Issued

The IRS says “taxpayers with claims do not need take any action at this point.” The IRS also emphasized that the workers on the toll-free lines do not generally have any information on the specific status of the claims.

For taxpayers waiting for their money, that is not reassuring. Unfortunately, this leaves limited options, many of which will not make sense for most taxpayers, such as:

• Litigation: Six months after filing a refund claim, a taxpayer can sue the IRS for refund. This will generally not make sense except in rare situations as litigation is costly and time consuming.
• Taxpayer advocate: In the 2025 budget hearing, IRS Commissioner Werfel indicated that the IRS was working with the Taxpayer Advocate Service to help expedite claims for “financial hardship” cases. The IRS has not released any formal information on this, so there is no guidance on what it considers hardship or how this would impact timing.

For additional information on the ERC program and whether your business qualifies, reach out to your KSM advisor or complete this form.