There are several new developments in the Internal Revenue Service’s ongoing campaign to combat false and fraudulent Employee Retention Credit (ERC) claims, including an indefinite extension of the agency’s moratorium on processing claims (which also impacts the ERC withdrawal program) and the emergence of a legislative deal to end the ERC as soon as January 31 as part of the 2024 federal budget.

Other news included:

• The Taxpayer Advocate pushing for speedier ERC claim processing to ensure funds get to taxpayers more quickly.
• The IRS requesting that Congress ban contingency fees for ERC claim preparers, establish penalties for ERC promoters, and extend the statute of limitations on assessment for ERC claims.

Background on the ERC

The ERC is a legitimate, refundable tax credit designed to help businesses that continued to pay employees while they were shut down due to the COVID-19 pandemic or that experienced a significant decline in gross receipts in 2020 and 2021. While Congress designed the ERC with the laudable goal of helping businesses survive the COVID-19 pandemic by encouraging them to keep employees on their payrolls, ERC fraud has run rampant and unscrupulous promoters have pushed businesses that do not qualify for the credit to file improper ERC claims. For almost two years, the IRS has engaged in a concerted effort to stamp out fraudulent ERC claims.

IRS Commissioner: No End Date for Moratorium on ERC Claims Processing

Speaking to Congress and a tax conference hosted by the Washington D.C. Bar last week, the IRS Commissioner stated that the IRS has “no definitive timetable” for ending its moratorium on processing ERC claims received on and after September 14, 2023. While the IRS continues to process ERC claims received before September 14, 2023, the Commissioner acknowledged that it was taking longer to do so due to the volume of illegitimate claims, especially since “almost all” of the ERC claims the IRS is currently reviewing were filed in the three months prior to September 14, 2023.

Establishing processes and procedures to help the IRS identify improper ERC claims has added to the delay. For instance, the IRS is using scanning technology to transcribe information it previously entered manually. The IRS has digitized roughly one-third of the ERC return backlog, but the process will continue at least through April. The Commissioner told Congress that funds allocated to the IRS via the Inflation Reduction Act are helping to establish these processes, all of which are designed to prevent fraud.

The ERC withdrawal program, which allows employers that filed ERC claims but have not yet received a refund to withdraw their submission and avoid future repayment, interest, and penalties will also continue. The IRS has indicated that the withdrawal program will end at the same time as the moratorium.

Potential Tax Laws Might End the ERC Program Early

As part of negotiations over the federal government’s 2024 budget, already three months late and with a government shutdown looming, Congress is discussing expanding the child tax credit and a number of business tax credits. To pay for these credit expansions, Senate Finance Committee Chair Ron Wyden (D-Ore.) and House Ways and Means Chair Jason Smith (R-Mo.) have reached a deal that would end the ERC program on January 31, 2024. If the deal is not enacted, employers still have until April 15, 2024 to file ERC claims for 2020 and until April 15, 2025 to file ERC claims for 2021.

The proposed legislation also includes provisions to extend the statute of limitations on assessment to six years and increase the penalty for aiding and abetting the understatement of a tax liability by an ERC promotor to $200,000 ($10,000 in the case of an individual) or 75% of the gross income the promoter derived from assisting with an ERC claim, whichever is greater. Currently a $1,000 penalty may apply to a person who knows or has reason to know that an understatement of a tax liability of another person would result from the use of their aid, assistance or advice. Further, the legislation increases the paid tax return preparer penalty for each failure to comply with due diligence requirements relating to the ERC to $1,000 from $500.

ERC promoters would also be subject to listed transactions provisions including a requirement to file return disclosures and provide lists of clients to the IRS upon request. The legislation defines an ERC promoter as any person who provides aid, assistance or advice with respect to an affidavit, refund, claim or other document relating to an ERC, if the person charges fees based on the amount of the credit or meets a gross receipts test.

The new penalty provisions for aid, assistance or advice are effective for services provided after March 12, 2020. The due diligence requirement is effective after the date of enactment.

Although the rare bipartisan agreement is supported by the tax writing chairs of both parties, whether Congress ends the ERC program early is still up in the air as members are primarily focused on funding the government before the next budget deadline of midnight on Friday, January 19, 2024. Absent a signed budget or a new continuing resolution, the government will begin shutting down January 20, 2024 and completely shut down February 3, 2024. Further, the legislation faces opposition from some members of Congress, with Senator Charles E. Grassley (R-Ia.) stating, “I think the chances of getting it done, at least during the January period, is pretty nil.”

IRS National Taxpayer Advocate Pushes for IRS to Process ERC Claims More Quickly

While the IRS Commissioner is extending the ERC processing moratorium, the IRS National Taxpayer Advocate is pushing for speedier processing of ERC claims. The National Taxpayer Advocate’s Annual Report to Congress notes that during the two-month period surrounding the start of the moratorium, the IRS received about 45,000 ERC claims per week but only processed about 150 per week, resulting in approximately 1 million unprocessed claims by early December, which is expected to rise to almost 1.3 million by February.

Not only are taxpayers waiting on the IRS to process their ERC claims and pay out funds, but they have no way of learning the status of their claims or how long it may take to process them. Acknowledging the existence of illegitimate ERC claims and that the IRS needs to increase its review of all ERC claims, the Taxpayer Advocate nonetheless noted the financial hardship legitimate businesses are facing due to the delays in processing their bona fide ERC claims.

IRS Commissioner Proposes Additional Legislative Enforcement Against Illegitimate ERC Claims

The IRS Commissioner has asked Congress to pass legislation to help the IRS increase its enforcement against illegitimate claims. The requested legislation would have three parts:

• Banning ERC preparers from charging fees based on a percentage of the ERC claimed. The IRS believes that contingency fees incentivize preparers to improperly inflate the amount of an ERC to which an employer is entitled. ERC preparers, however, argue that employers are unable to pay preparation fees up front and their contingency fees provide greater access to ERC claims.

• Enabling the IRS to further penalize preparers of ineligible ERC claims. According to North Carolina Senator Thom Tillis, this would enable the IRS to penalize preparers from ERC “mills” who misinformed their customers by providing advice contrary to what the employers’ regular tax preparers advised.

• Extending the statute of limitations on assessment for ERC claims filed in 2020 and the first two quarters of 2021 from three years to five years. Congress previously extended the statute of limitations on assessment for ERC claims filed in the third and fourth quarters of 2021 from three years to five years.

The Takeaway

The IRS continues to press enforcement of improper ERC claims. Extending the moratorium not only allows it to continue a more detailed review of claims without distributing funds, but also provides taxpayers additional time to withdraw their claims. Combined with the new Voluntary Disclosure Program, the moratorium and withdrawal program provide the IRS a process to eliminate the most obviously illegitimate ERC claims.

At the same time, however, neither the IRS nor Congress appear satisfied with the current limitations on civil enforcement. Eliminating contingency fees, increasing promoter penalties, and extending the statute of limitations on assessment allow the IRS to attack ERC noncompliance at its source — promoters intentionally preparing unqualified ERC claims — while also giving the IRS additional time to examine employers themselves. Potential legislation to end the ERC program will, at a minimum, eliminate approximately 15 more months of ERC claims.

To make a long story short, ERC enforcement is going to continue for years to come and, if the IRS Commissioner has his way, the IRS will continue to increase its enforcement capability.

[View source.]