Faced with an onslaught of questionable and potentially fraudulent ERC (Employee Retention Credit) claims, the Internal Revenue Service announced on September 14th that the agency is placing a moratorium on the processing of new claims, while more closely scrutinizing the more than 600,000 ERC claims awaiting processing by the IRS.
The ERC was created by Congress in 2020 as a refundable payroll tax credit to incentivize businesses to keep employees on payroll during the Covid Pandemic, while providing liquidity which could be used for general business purposes. Eligible companies could claim ERC if they met one of two tests: a significant decline in Gross Receipts or a Suspension of Business Operations. The credit may still be claimed through April 15th, 2024, for claims that relate to tax year 2020, while 2021 claims may be filed until April 15th, 2025. This moratorium places a halt on the processing of all ERC claims yet to be filed with the IRS until at least January 2024.
The primary focus of IRS’ moratorium is to halt fraudulent and excessive claims being filed by credit firms specializing in ERC claims. These firms proactively solicit companies through aggressive marketing tactics charging hefty contingent fees up to 25% of the ERC claim generated. These companies are highly incentivized to coax clients into claiming the maximum credit available under the law, while ignoring the complex labyrinth of rules and requirements for submitting a valid claim. The IRS has indicated up to 95% of recently filed claims are fraudulent, rife with errors, ineligible claims, and being filed under lax, loose, and incorrect interpretations of the spirit and intent of the law and credit program.
Included with the IRS’ notice is the announcement of two new relief options applicable to the ERC program particularly relevant to those companies that worked with aggressive ERC promoters:
- Settlement Program: this program is relevant to those companies who wish to repay an improperly claimed ERC payment (more details to come this fall).
- Withdrawal Option: for those companies that have filed an ERC claim, but the claim has not been processed. This option should be available soon, more details to follow. Small businesses that utilize this option may be able to avoid possible repayment issues. Completion of the withdrawal option will not allow willfully filed fraudulent claims to be exempted from potential criminal investigation and prosecution.
What this means for taxpayers and small businesses:
As the IRS continues to add additional safeguards and procedures for ERC claims, there are several steps businesses can take depending on where they are in the process:
- ERC Claim Pending: IRS will continue to process claims on file with the agency, but processing times will significantly increase due to additional scrutiny and compliance checks currently being implemented.
- Yet to File a Claim: businesses must carefully review ERC guidelines to ensure the company has a case for a valid claim. Speak to a trusted tax professional and be wary of any promoter or marketing firm that reaches out to your business directly. It is imperative businesses avoid a bad claim to avoid complications with the IRS.
- Withdraw Existing Claim: for those businesses that have filed their ERC claim with the IRS which is pending, carefully review the existing and newly released guidance with a qualified tax professional to ensure the veracity of your claim. If you believe your ERC claim was submitted improperly, consider if this is a good option for your business working with a qualified tax professional.
- Settlement Program: if a business has already received an ERC claim that they now believe may have been improperly or erroneously claimed, the IRS is working through final details of a settlement program which will be announced in the fall where businesses may repay their ERC claims. This program will allow businesses to avoid penalties and future compliance action.
The IRS has released the following updated guides here:
ERC Eligibility: https://www.irs.gov/coronavirus/employee-retention-credit
Frequently Asked Questions: https://www.irs.gov/coronavirus/frequently-asked-questions-about-the-employee-retention-credit