Last month, the Internal Revenue Service (IRS) announced an extension of a pause on processing Employee Retention Credit (ERC) claims submitted after Sep. 14, 2023. The agency closely examined ERC claims in backlog and determined that 10-20% of claims were low-risk, 60-70% of claims had unacceptable risk, and 10-20% had high risk. I applaud the IRS’ prudent use of the increased funding from the Inflation Reduction Act to sift through invalid claims, identify low-risk claims, and perform a timely analysis of millions of ERC claims.
The IRS has said that it would “begin judiciously processing more” low-risk claims, with the first payments going out later in the summer. However, the already identified low-risk ERC claims, submitted by struggling small businesses, should be approved and paid now. Immediately approving and paying low-risk ERC applicants would greatly benefit the roughly 150,000-300,000 applicants who are still operating in a challenging economic environment.
It’s important to contextualize why the ERC implementation has been difficult for both the Service and taxpayers. Before the COVID-19 pandemic, Congress established ERC in the aftermath of Hurricane Katrina and several other natural disasters. In these cases, ERC was targeted locally to the areas impacted. COVID-19 was the first time the ERC was applied nationwide.
Additionally, Congress changed eligibility requirements for the ERC benefit after the initial CARES Act package was enacted. Confusion for taxpayers created by changes in eligibility in tandem with the focus on the Paycheck Protection Program (PPP) and Economic Injury Disaster Loan program (EIDL) pushed Congress to extend the filing deadline for amended ERC claims.
Like the PPP, the ERC benefit incentivized businesses to keep workers on the payroll and, in many cases support health benefit expenses. However, unlike PPP funds that were appropriated, the ERC provided financial support by giving employer taxpayers a refund on taxes already paid. The employers who filed ERC claims kept their employees while suffering heavy operating losses based on the promise that the government would help make them whole. Years later, too many businesses are waiting for the government to fulfill that promise.
Policy changes weren’t the only obstacle for small businesses applying for ERC. Complying with changing and complicated public health regulations, and labor shortages, among other challenges made the ERC slip off some business owners’ radars. It was only when many saw their competitors apply for and receive ERC funds that many realized they themselves were eligible.
It is true that the fog of war and the predatory schemes of some bad actors misled some small businesses into thinking they were eligible for ERC when they were not. That’s why the careful work of the IRS to sort the high-risk, unacceptable risk, and low-risk was so important. However, fighting fraud should not come at the expense of legitimate small businesses with claims pending at the IRS.
Almost every federal agency was mobilized to keep the economy from unraveling. I’m proud to say that the IRS largely answered the call. IRS employees processed 476 million Economic Impact Payments to households, advanced 4 million economic injury disaster loan applications, and paid over 2 million ERC claims for small businesses.
Right now, the IRS has the opportunity to finish the great work it started during the pandemic. Finalizing the identified legitimate batch of claims is the place to start.
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