By: Taylor Bickley, CPA, Manager CFO Advisory
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:
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:
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
Question and Answer Guide: https://www.irs.gov/newsroom/employee-retention-credit-eligibility-checklist-help-understanding-this-complex-credit