Navigating Employee Retention Credit delays: What business owners need to know

For many businesses, the Employee Retention Credit (ERC) has provided a financial lifeline, bringing much-needed relief during challenging times. This refundable tax credit was introduced to incentivize businesses to retain employees during the COVID-19 pandemic.

However, while many businesses are eligible and have claimed the ERC, significant delays in processing refunds have become a major challenge. As of October 2024, the IRS reported a backlog of 1.2 million ERC claims, with many businesses waiting for more than a year for their refunds. These delays present more than just an inconvenience, they carry real financial implications for business owners who relied on the credit to sustain their operations and plan ahead.

This blog will explore the reasons behind these delays, their impact on businesses, and practical steps business owners can take to navigate challenges. By understanding the scope of the problem and equipping yourself with actionable strategies, you can better address the obstacles.

The scope of the problem

Delays by the numbers

With an IRS backlog of 1.2 million claims still pending, the situation is expected to worsen as the IRS shifts its attention to the 2025 filing season. Although the IRS has made progress in some aspects of addressing the backlog, the staggering volume of claims continues to overwhelm available resources.

The IRS’s fraud prevention emphasis

To prevent fraudulent claims, the IRS has implemented stringent verification processes. While such measures are critical to maintaining the integrity of the program, they have significantly slowed the processing of legitimate claims. Many businesses are subjected to audit-like reviews, which adds to the delays. Such increased scrutiny underscores the challenges of balancing efficient processing with fraud prevention.

Impact on businesses

The delayed refunds are creating serious challenges for businesses, including:

• Cash flow issues: As businesses relying on ERC refunds are struggling to cover operational costs, they face liquidity crises. For small businesses in particular, this can mean the difference between staying afloat and shutting down.

• Operational disruptions: Delayed refunds can cause businesses to scale back critical operational decisions and processes. It may also lead to postponed investments, such as in new equipment or an expanded workforce. In some cases, businesses are forced to downsize or implement layoffs to preserve cash flow. These disruptions affect not only a business’s bottom line but its ability to grow and be competitive in the market.

• Uncertainty in financial planning: Prolonged waiting periods are making it a challenge for businesses owners to plan with confidence. An already challenging economic landscape becomes even more complex due to the lack of clarity around refund timelines.

Why ERC processing delays are happening and the additional challenges businesses face

Fraud prevention measures

The IRS’s focus on detecting and preventing fraud is essential, especially given the significant amount of money involved in ERC claims and refunds. However, with these measures being implemented using a broad approach, even businesses with untarnished records may face lengthy delays.

Resource constraints

Another contributing factor to the delays is the IRS’s limited resources. As the agency prepares for the busy 2025 filing season, there are fewer staff and tools available to take on the growing backlog of ERC claims. The combination of resource constraints and increasing demand has created a bottleneck that shows no signs of immediate resolution. Additionally, the agency’s efforts to modernize its systems and processes have added further temporary strain to its capacity.  The IRS may also lose funding previously appropriated as part of the Inflation Reduction Act. 

Communication gaps

The challenges business owners face with the ERC claims process have been heightened by limited communication from the IRS. Businesses often have difficulties getting updates on their claim statuses. Additionally, disallowance letters—notifications that a claim has been rejected—can often be vague or lack clear instructions needed for next steps. This can lead to frustration for business owners, as they need to understand the status of their claims and address any potential issues.  

Refund theft

Some businesses have unfortunately experienced an additional challenge—refund theft. These instances can be devastating for affected businesses, causing additional hurdles in resolving the issue and securing refunds. Waiting for replacement checks only adds to delays and further strains in operations.  

Practical steps for business owners

Maintain accurate documentation  

To avoid issues, it’s essential to stay organized with relevant documents such as payroll records and tax filings. You can prepare an easy-to-reference file to streamline the process in case the IRS requests additional information. This documentation should include detailed records such as employee wages, health insurance costs, government orders to the extent eligibility is premised on a full or partial suspension of operations and other expenses relevant to the ERC claim. Businesses can reduce the risk of further delays by having these documents readily available and prepared for quick response to IRS inquiries.  

Proactively monitor claims

Business owners should regularly follow up on their ERC claims using available IRS resources, including online tools. A proactive approach can help identify potential issues earlier, preventing further complications.  

Review notices thoroughly

It’s critical to carefully examine any disallowance letters for errors or missing information. If the reasoning is unclear, consider consulting a tax professional to evaluate whether an appeal is warranted. Understanding key areas of a disallowance letter can mean the difference between the quick resolution of an issue and a prolonged delay.  

Work with a tax professional

Navigating the complexities of ERC claims and the IRS’s processes can be challenging. Tax professionals are prepared to help businesses track claims, resolve disputes and address any issues that arise. They can also offer guidance on ways to avoid common pitfalls and prepare for potential inquiries or audits.  

By staying proactive, maintaining accurate documentation, and seeking professional assistance, business owners can mitigate some of the difficulties that come with navigating the current environment more effectively.  

If you have questions about your ERC claim or need guidance through the process, contact me or another Kaufman Rossin tax professional to discuss your situation and explore the next steps.