The Internal Revenue Service (IRS) issued a news release on September 14, 2023, declaring an immediate moratorium on processing new Employee Retention Credit (ERC) claims through at least December 31, 2023.
What is the ERC? The ERC is a refundable tax credit intended for businesses that 1) continued paying employees while their operations were suspended in 2020 and 2021 due to governmental orders issued in response to the COVID-19 virus, or 2) suffered significant declines in gross receipts from March 13, 2020 to September 30, 2021. Eligible employers can receive credits worth up to $26,000 per retained employee. The ERC can still be claimed on amended returns.
The potentially high value of the ERC, combined with the fact that some employers can file claims for it until April 15, 2025, has led to an influx of fraudulent promoters offering to help businesses claim refunds for the credit.
Why the moratorium? The IRS believes the moratorium is necessary due to a “flood of improper claims” and “the continued aggressive marketing” of the credit by unscrupulous promoters. The IRS expressed concern that businesses need to be protected from “being pressured and scammed by aggressive promoters and marketing.”
Who does the moratorium affect? The moratorium applies only to the processing of new ERC claims. The IRS will continue to process existing claims, but these will be subject to increased compliance scrutiny. The processing time goal for ERC claims currently in the pipeline will increase from 90 to 180 days. The IRS warned that they may seek additional documentation from taxpayers to ensure that claims are legitimate.
The IRS also reminded employers that any ERC payments that were received improperly will need to be repaid and may be subject to interest and penalties. Businesses who paid large contingency fees could find it more difficult to repay the full amounts received.
What resources are available to determine ERC eligibility? The IRS shared a new Question and Answer Eligibility Checklist and a Frequently Asked Questions (FAQ) document for businesses to help them determine ERC eligibility in consultation with a trusted tax advisor.
In addition to these resources, the IRS provided advice for employers, depending on where they are in the process regarding the ERC:
- Businesses who have filed claims but whose claims are still unprocessed:
Employers who have already filed an ERC claim that hasn’t been processed or paid should review their eligibility during the moratorium with a trusted tax professional. The IRS specifically mentions that claims made due to supply chain issues rarely meet the eligibility criteria.
The IRS will be creating a pathway for taxpayers to withdraw unpaid claims if they now believe that they are not eligible, even if the claim is under audit or awaiting audit. The IRS’s intention is to allow businesses who may have been misled by promoters to avoid possible repayment issues and paying promoters’ contingency fees. However, the IRS cautioned that withdrawing a claim does not protect parties who willfully filed or conspired to file fraudulent claims from potential criminal investigation and prosecution.
- Businesses who have not yet filed ERC claims:
The IRS advises employers who have not filed a claim to review the ERC guidelines during the moratorium with a trusted tax professional and waiting to file after the moratorium period.
- Businesses who have already received ERC payments:
The IRS announced that a new settlement program for businesses to repay improperly received ERC funds will be available in the fall of 2023. Employers who have already received ERC amounts for which they now believe there were not eligible may be able to take advantage of the program. The settlement program is expected to allow businesses to repay their ERC claims and avoid penalties and future compliance actions. In addition, the IRS is looking at options for businesses that paid a contingency fee out of their ERC payments.
Still considering claiming the credit?
The IRS urges taxpayers to carefully review the ERC guidelines during the moratorium period. Legitimate claimants shouldn’t be dissuaded, but, as the IRS says, it’s best to confirm the validity of your claim with a “trusted tax professional — not a tax promoter or marketing firm looking to make money” by taking a “big chunk” out of your claim. Contact us if you have questions regarding the ERC and how the IRS moratorium period on new claims may affect your business.