As many have heard, on September 14, 2023 the Internal Revenue Service (IRS) has taken the unprecedented step of halting the processing of new claims for the Employee Retention Credit (ERC) through at least December 31, 2023. The halt comes in response to a growing influx of dubious claims and deceptive practices by “specialist firms” promising businesses eligibility for this valuable tax benefit.
The Employee Retention Tax Credit (ERC or ERTC for short) is a pandemic-era tax break designed to aid small businesses during the COVID-19 crisis. While originally there was not much traction for the credit, with most employers opting to (at the time) choose the more immediate and “valuable” Paycheck Protection Program (PPP) Loan rather than the ERC, legislation later in 2020 and 2021 allowed firms to claim both the PPP and the ERC, which provided much-needed support to small businesses and organizations grappling with the economic impact of the COVID-19 pandemic. This credit can potentially amount to thousands of dollars per eligible employee, serving as a lifeline for countless enterprises during these challenging times.
With the increased eligibility for businesses and organizations to claim both this credit and the PPP Loan, the IRS began to see an influx of claims in 2021 and 2022 for the ERTC. According to the investment banking firm Piper Sandler, the IRS has paid more than $150 Billion in ERC Claims to date, which is approximately triple the original congressional estimate when the credit was passed as part of the CARES Act.
The key impacts of the shutdown
Taxpayers with a claim pending prior to September 14, 2023
- These claims will still be processed, but with a longer wait time
Taxpayers with a claim filed after September 14, 2023
- These claims will not be processed until January 2024 at the earliest; likely to be increased delays to deal with potential backlog
Taxpayers with a pending claim they are unsure of eligibility
- The IRS will be providing details of a procedure to withdraw the pending claim.
Taxpayers with a paid claim
- The IRS will be developing a “Settlement” program that will allow businesses to repay these claims voluntarily to avoid penalties and further compliance actions. Details are still pending on this program
Why did the IRS Pause these claims?
The IRS has placed this moratorium on new claims in an effort to protect taxpayers from scams and from a perceived surge of questionable claims. The IRS has for months been warning taxpayers about so-called ERC Mills, which promise employers these credits with aggressive marketing tactics and equally aggressive claims of eligibility. The IRS has even provided a warning related to these claims for employers, stating that these providers will often:
- Contact the taxpayer unsolicited
- Charge large upfront fees or large fees (10-15%) of the total credit
- Refuse to sign the ERC amended payroll return
- Provide aggressive claims of eligibility within minutes of speaking to the employer without any detailed analysis
Often, these firms in the “fine print” rely on the employer to represent that they, as the employer, made the determination of eligibility, thereby shifting the burden further on the employer. These firms are using arguments like “OSHA” and “Supply Chain Disruption” without being able to provide copies of orders and without support of the direct impact to the employer, a requirement to claim the credit if being claimed because of an interruption in business.
In the release announcing the pause, IRS Commissioner Danny Werfel said “The IRS is increasingly alarmed about honest small business owners being scammed by unscrupulous actors, and we could no longer tolerate growing evidence of questionable claims pouring in,” Werfel said. “The further we get from the pandemic, the further we see the good intentions of this important program abused. The continued aggressive marketing of these schemes is harming well-meaning businesses and delaying the payment of legitimate claims, which makes it harder to run the rest of the tax system. This harms all taxpayers, not just ERC applicants.”
“For those people being pressured by promoters to apply for the Employee Retention Credit, I urge them to immediately pause and review their situation while we look to add new protections and safeguards to stop bad claims from ever coming in,” Werfel said. “In the meantime, businesses should seek out a trusted tax professional who actually understands the complex ERC rules, not a promoter or marketer hustling to get a hefty contingency fee. Businesses that receive ERC payments improperly face the daunting prospect of paying those back, so we urge the utmost caution. The moratorium will help protect taxpayers by adding a new safety net onto this program to focus on fraudulent claims and scammers taking advantage of honest taxpayers.”
Next Steps for the IRS
Beyond pausing any new claims, the IRS has stated that any current claims will now have a standard processing goal of 180 days, double the current 90-day goal. This delay will be used to have stricter compliance reviews, including a request for additional information in some cases before the claim is processed.
Beyond the delay, the IRS will be “intensifying audit work” and “criminal investigations” on promoters and businesses, with “hundreds” of criminal cases and “thousands” of ERC claims referred for audit. The IRS has stated to date there have been 252 investigations with claims of over 2.8 Billion which they believe are fraudulent.
The IRS has also asked the Senate Finance Committee in a letter on September 14th for more tools to combat this problem specifically
1.) The IRS has asked for the authority to regulate paid tax preparers. This is a long-standing IRS battle from a new approach, as this program and the fraudulent claims have brought a new layer of complexity to this matter.
2.) The IRS has asked for specific ERC related legislation – while vague on details, the request is said to have included legislation contingency fees and in the past they have hinted at changing the statute of limitation to end the program sooner.
What is next for employers?
As noted above, for employers with a pending legitimate claim – many of whom have already been patiently waiting, the actions of the IRS will make their wait go on even longer. Organizations shouldn’t plan to see any funds until 2024 at this point and maybe even longer. For employers with a recently uncovered claim, they should still continue to work through the process but should heed the IRS warnings about this program and should verify their eligibility even more carefully than before. For tax year 2020 claims, employers have until April 15, 2024 to request the claim; for 2021, they have until April 15, 2025. These deadlines are subject to change with legislation as noted above.
For employers with a pending claim they are uncertain about, they can withdraw this claim once the IRS publishes the procedure for doing so. Similarly, employers with previously paid claims that they feel now may have been in error should be on the lookout for the IRS settlement program.
While the ERC was created with the intent of helping struggling small businesses during the pandemic, its effectiveness has been compromised by the rise of deceptive promoters and questionable claims. Unfortunately, this is a case of a few bad apples spoiling the bunch. The IRS’ decision to halt new claims processing is a proactive step towards addressing this issue and ensuring that the ERC serves its intended purpose—to support and safeguard small businesses during challenging times. Businesses are encouraged to exercise caution and seek professional guidance. We are still finding businesses and organizations that are eligible for the credit based on either a government shutdown or a decline in gross receipts and encourage employers to still remember that while the IRS has paused these claims, the legitimate claims should still ultimately be allowed.
Edward McWilliams, CPA
Ed is a Partner in the firm’s tax and business advisory practice focusing on providing services to middle market private companies across different industries as well as to early stage startups. Ed has over a decade of experience providing tax and business consulting services to these companies of different sizes and across different industries, bringing a broad and diverse knowledge base and strategic solutions to the many complex issues that businesses face.