The IRS has imposed a moratorium on new Employee Retention Credit (ERC) filings due to a surge of fraudulent and questionable claims. The moratorium on new filings for the Covid-19-era relief program for businesses was announced on Thursday, Sept. 14, 2023, and is expected to extend at least through the end of this year. 

The processing of ERC claims already in progress may be slowed by increased IRS scrutiny. The enhanced compliance review of existing claims is critical to protect against fraud but also to protect businesses from facing penalties or interest payments stemming from bad claims pushed by promoters, IRS Commissioner Danny Werfel said.

‘Substantial Share’ of Questionable Claims

Werfel ordered the immediate moratorium amid growing concerns inside the IRS, from tax professionals as well as media reports that a substantial share of new ERC claims are ineligible and increasingly putting at financial risk businesses that are being pressured and scammed by aggressive promoters and marketing.

When properly claimed, the ERC – also referred to as the Employee Retention Tax Credit or ERTC – is a refundable tax credit designed for businesses that continued paying employees during the Covid-19 pandemic while their business operations were fully or partially suspended due to a government order, or they had a significant decline in gross receipts during the eligibility periods. The credit is not available to individuals. The IRS has received approximately 3.6 million ERC claims over the course of the program

Since the program ended in late 2021, businesses have been able to apply retroactively for the ERC if they didn’t utilize the program at the time they were eligible, but the statutes of limitations for capturing those tax credits will start in 2024, meaning the window will close on the program.

Promoters have begun aggressively marketing to business owners to apply for the ERC and charging them a percentage of the tax credits they recover as a fee. But thousands of claims coming through these promoters have proven to be either fraudulent or ineligible. As of July 31, 2023, IRS Criminal Investigations (IRS-CI) has initiated 252 investigations involving over $2.8 billion of potentially fraudulent ERC claims.

The IRS recently announced it was increasingly shifting its focus to review ERC claims for compliance concerns, including intensifying audit work and criminal investigations on promoters and businesses filing dubious claims.

Taxpayer Q & A

What if I already filed an ERC claim and am waiting for my refund?

Payouts for claims will continue during the moratorium period but at a slower pace due to the detailed compliance reviews. Existing ERC claims will go from a standard processing goal of 90 days to 180 days – and much longer if the claim faces further review or audit. The IRS may also seek additional documentation from the taxpayer to ensure it is a legitimate claim.

What if I received a tax refund for an ERC claim that I believed was eligible, but have learned that it was not eligible?

Anyone who improperly claims the ERC must pay it back, possibly with penalties and interest. This underscores the importance of taxpayers taking precautionary steps to independently verify their eligibility – preferably with a qualified tax advisor – to receive the credit before applying through a promoter.

What if I worked with a promoter and they filed a fraudulent or ineligible claim on my behalf?

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.

If I’m concerned about an ERC claim that’s been filed but not yet processed, what can I do?

The IRS is developing new initiatives to help businesses who found themselves victims of aggressive promoters. This includes a settlement program for repayments for those who received an improper ERC payment; more details will be available this fall. In addition, the IRS is developing a special withdrawal option for those who have filed an ERC claim that has not been processed or paid. This option will allow taxpayers, including many small businesses who were misled by promoters, to avoid possible repayment issues and paying promoters contingency fees. Filers of more than 600,000 claims awaiting processing will be eligible when the program is finalized.

Would withdrawing a fraudulent claim help me avoid enforcement action?

Those who have willfully filed fraudulent claims or conspired to do so should be aware that withdrawing a fraudulent claim will not exempt them from potential criminal investigation and prosecution.

The ERC is an incredibly complex credit, and there are very specific eligibility requirements for claiming the credit. Employers can claim the ERC on an original or amended employment tax return for qualified wages paid between March 13, 2020, and Dec. 31, 2021. However, to be eligible, employers must have:

• Sustained a full or partial suspension of operations due to orders from an appropriate governmental authority limiting commerce, travel or group meetings because of Covid-19 during 2020 or the first three quarters of 2021,
• Experienced a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021, or
• Qualified as a recovery startup business for the third or fourth quarters of 2021.

More information is available on IRS.gov/erc. For more details on the ERC moratorium, see the IRS release.

If you have concerns about an ERC claim that you have filed or are planning to file, contact your G.T. Reilly advisor.