Recently, the IRS made headlines by announcing a temporary halt in processing new claims related to the Employee Retention Credit (ERC) program. The reasoning? Rising concerns over improper claims.

For the past 2+ years, we have seen many businesses being taken advantage of by so-called “ERC mills.” These are companies set up ostensibly to help businesses file large ERC claims and “get the money they deserve” from the government. Unfortunately, due to the lack of oversight of the ERC program, the mills quickly figured out that just about any request for ERC funds was quickly processed with almost no regard for whether the business qualified under the rules of the program. Business models were adjusted to shift from helping businesses in need to filing as many large claims as possible while earning large fees in the process.  

The IRS is now responding to this phenomenon. Let’s break down the implications and what this means for businesses.

What’s the Employee Retention Credit (ERC) Program?

The ERC is a refundable tax credit designed to support businesses that retained their employees during the COVID-19 pandemic. It provided financial relief to businesses that experienced operational disruptions due to government mandates or a significant drop in revenue. However, it’s not available to individuals.

Why the Sudden Moratorium?

Concerns Over Improper Claims: The IRS has been bombarded with a slew of ERC claims, many of which are believed to be ineligible. There’s rising anxiety about these bogus claims, as they are often linked to aggressive marketing strategies that push businesses to file despite not meeting the requirements.

Protecting Honest Businesses: Amidst this chaos, the IRS wants to shield honest businesses from falling prey to scams and facing the repercussions of filing incorrect claims.

The Scale of the Problem: The IRS has received about 3.6 million ERC claims throughout the program. Alarming reports suggest that many claims filed in recent times might be improper, with some tax professionals noting that 95% or more of recent submissions are ineligible.

Immediate and Future Implications

Moratorium: Effective immediately, the IRS has halted the processing of new ERC claims until at least the end of the year.

Existing Claims: If you’ve already filed a claim, don’t expect quick results. Due to heightened scrutiny, the usual 90-day processing time may now extend to 180 days or even longer.

Criminal Investigations: The IRS is not just slowing down; they’re clamping down. With the support of the Justice Department, they’re pursuing promoters and businesses suspected of fraudulent activity. Currently, hundreds of criminal cases are being examined, with thousands of ERC claims earmarked for audits.

Support for Affected Businesses: The IRS is introducing initiatives to assist businesses that may have been misguided by aggressive promoters, including a settlement program for those who’ve received improper ERC payments.

Withdrawal Option: A special provision will soon be in place, allowing businesses to retract their ERC claims if they haven’t been processed or paid. This provides a safety net for businesses who feel they might have made an error.

Advice for Businesses

For Businesses Awaiting Claims: Patience is key. Understand that there’s an enormous backlog of claims, and the IRS is implementing thorough checks to ensure legitimacy.

Considering Filing a Claim?: Thoroughly review the ERC guidelines and consult a trusted tax professional before proceeding. Stay away from aggressive marketers promising risk-free submissions.

Already Filed and Doubtful?: If you believe your claim might be improper, consider withdrawing it. The IRS will soon provide more details on how to do this.

Received an ERC Payment in Error?: Stay tuned for more details on the IRS’s settlement program. It will offer a pathway for businesses to repay ERC claims without facing penalties.

Final Thoughts

The ERC was introduced with noble intentions, aiming to help businesses during challenging times. However, as with many financial relief programs, it’s been marred by misuse and fraud. As we move forward, businesses should approach the ERC with caution, armed with the correct information, and always prioritize integrity.

For a comprehensive look at the ERC and its requirements, visit the official IRS website at IRS.gov/erc.