By: Lisa M. Wood, CPA, MT - Director of Tax
On September 14, 2023, the IRS announced an immediate stop for processing new Employee Retention Credit (“ERC”) claims through at least the end of the year. It cited concerns that many new claims filed are ineligible for the credit, and businesses are at financial risk of scams from aggressive marketing and promotors.
What is the ERC?
The ERC is a refundable tax credit available to businesses and tax-exempt organizations. Entities qualify for the credit if they paid employee wages and were adversely affected by the COVID-19 pandemic, including:
- Shut down by government order during 2020 or the first three calendar quarters of 2021, or
- Experienced the required decline in gross receipts during the eligibility period, or
- Qualified as a recovery startup business in the third or fourth quarter 2021
For more information about qualifying for the credit, please see our December 2022 article “Is the promise of an Employee Retention Tax Credit refund too good to be true? It may be!” https://mybuckingham.com/insights/is-the-promise-of-an-employee-retention-tax-credit-refund-too-good-to-be-true-it-may-be
Why is the IRS stopping applications?
The IRS has issued several warnings over the past year regarding ineligible ERC claims and companies aggressively promoting claims. The moratorium on accepting new ERC applications is necessary for two reasons: to protect against fraud and to protect businesses from facing penalties and interest charges from ineligible claims pushed by aggressive marketing promotors.
Thousands of claims have been referred to audit, and hundreds of claims have been referred for criminal cases. The IRS Criminal Investigation division is working to identify fraud, and promotors of fraudulent claims, and will refer them to the Justice Department for prosecution. So far, it has uncovered suspected fraud totaling more than $8 billion. Several claims have resulted in federal charges, and a few cases have already reached the sentencing phase with the average sentence being 21 months.
What are the next steps?
The IRS will continue to process ERC claims received prior to September 14, 2023. Processing times will greatly increase due to fraud concerns. Instead of the original goal of 3 months (although times were much longer), the IRS says the standard processing goal is now 6 months or longer. Additional time will be required if the claim needs further review or an audit. The IRS estimates that due to promotors aggressively pushing business to apply for the ERC regardless of the rules, 95% of the claims currently being submitted are ineligible.
If a claim has not been filed, the IRS Commissioner suggests that businesses with legitimate claims should seek out a trusted tax professional who understands the complex ERC rules and not use a promoter working to get a large contingency fee. The IRS anticipates accepting additional claims sometime after January 1, 2024, but cautions that the application process may be different than it is now. It recommends that businesses wait until after the moratorium period has ended before filing new claims.
If a claim has been filed that is not eligible, it can be withdrawn. The IRS recommends businesses review the program guidelines to ensure they qualify. For example, the IRS has many claims citing the basis for the claim as supply chain issues when businesses with those issues rarely meet the criteria. If a business filed an ERC claim that has not been processed or paid, the claim can be withdrawn if the business now believes it was improperly submitted.
If a business has already received an ERC that they now believe is in error, the IRS will provide additional details soon on a settlement program to allow businesses to repay the claim. Businesses participating in this program will not be subject to penalties or compliance or criminal charges.
If you have questions regarding your business’s eligibility for the ERC, please contact one of our team members in the Tax & Business Services Department at Buckingham Advisors. We are happy to review your specific circumstances.