Over the past year, the IRS has been warning taxpayers about the increasing number of aggressive promoters and marketing companies pushing the Employee Retention Credit (ERC). These bad actors, so called ERC Mills, have relied on direct mail, radio, and television advertisements promising business owners’ access to thousands in federal tax incentives. False claims are made that eligibility can be determined within minutes without quantifying the impact to operations or identifying the applicable government orders. They also assert that there is no risk in applying, which is also false because improperly awarded funds need to be repaid often with penalties and interest.
The situation finally reached a tipping point and on September 14, 2023, the IRS announced a moratorium on ERC claims through the end of 2023. Highlighted in IR-2023-169, the agency cites the freeze as necessary to allow for additional compliance reviews of existing claims. It also provides time for the agency to finalize details about two new resolution programs. While no new claims will be processed, previously submitted ones will continue to be addressed. To help clients, prospects, and others, Tanner has provided a summary of the key details below.
Guidance Overview
As stated above there will be at least a three-month moratorium on the processing of new claims. While existing ones will still be reviewed and paid out, it is expected to be completed at a much slower pace. The stricter compliance reviews mean the standard processing goal of 90 days will increase to 180 days or longer if the claim faces additional review or is selected for an audit. In certain cases, the IRS may also request additional documentation to validate legitimacy.
The new procedures are not only meant to curb fraud but also to protect businesses from facing potential penalties and interest arising from bad claims pushed by scammers and promoters. Many taxpayers are unaware of the fact that if a claim is improperly paid, the business must not only return the credit but will also be subject to penalties and interest.
“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,” said Danny Werfel, IRS Commissioner. “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.”
New Resolution Programs
There are also two new programs under development including a withdrawal option and a settlement program. Both are designed to provide options for resolution to businesses at different points in the claims process.
- Withdrawal Option – This option, which applies to those with filed but unpaid claims, will allow taxpayers to avoid potential repayment issues. Those who believe a claim was improperly submitted can withdraw it from consideration without penalty. This is true even if the case is awaiting or already under audit. Details are currently being finalized and are expected to be released this fall.
- Settlement Program – In cases where a business has already received a refund believed to be in error this program can be used to repay funds. It will allow businesses to avoid penalties and future compliance actions.
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Note that the IRS is not attempting to dissuade the filing of legitimate claims, rather it’s an effort to address the billions of fraud that has occurred with the ERC.
Taxpayers that have claimed the ERC should evaluate their supporting documentation as described in IRS FAQs related to adequate documentation to substantiate eligibility for the ERC credit, namely:
- Documentation to show how the employer determined it was an eligible employer that paid qualified wages, including: any governmental order to suspend the employer’s business operations;
- any records the employer relied upon to determine whether more than a nominal portion of its operations were suspended due to a governmental order or whether a governmental order had more than a nominal effect on its business operations;
- any records the employer used to determine it had experienced a significant decline in gross receipts;
- any records of which employees received qualified wages and in what amounts; and
- in the case of a large eligible employer, work records and documentation showing that wages were paid for time an employee was not providing services.
- Documentation to show how the employer determined the amount of allocable qualified health plan expenses.
- Documentation related to the determination of whether the employer is a member of an aggregated group treated as a single employer for purposes of the employee retention credit and, if so, how the aggregation affects the determination and allocation of the credit.
- Copies of the completed federal employment tax returns that the employer submitted to the IRS (or, for employers that use third-party payers to meet their employment tax obligations, records of information provided to the third-party payer regarding the employer’s entitlement to the credit claimed on the federal employment tax return).
If a business or non-profit believes it is eligible for the ERC, it’s important to consult with a qualified tax advisor to walk you through the process. If you have questions about the information outlined above or need assistance reviewing a prior ERC claim, Tanner can help. For additional assistance contact Shawn Marchant at 801-990-5928 or Matt Neuenswander at 801-924-5120 or click here to contact us. We look forward to speaking with you soon.