The Employee Retention Credit (ERC)—sometimes called the Employee Retention Tax Credit or ERTC—is a refundable tax credit for certain eligible businesses and tax-exempt organizations that had employees and were affected during the COVID-19 pandemic. Amid growing concerns about aggressive marketing and scams involving fraudulent activity, the Internal Revenue Service (IRS) has announced several initiatives aimed at helping small businesses concerned about an ineligible ERC claim. In this client alert, PilieroMazza summarizes key points of the ERC and important considerations to help small businesses avoid an audit or a criminal investigation. Businesses that received the credit but don’t meet the ERC rules should consider applying for the ERC Voluntary Disclosure Program before the March 22 deadline.

Background

The ERC is a refundable tax credit for certain businesses and tax-exempt organizations. Introduced as part of the 2020 pandemic relief package known as the CARES Act, the ERC was intended to encourage businesses affected by the COVID-19 pandemic to keep workers on the payroll. Since the inception of the program, the IRS received approximately 3.6 million claims.

Many small businesses filed an ERC claim, which provided essential pandemic relief when filed by eligible businesses. However, thousands upon thousands of these claims were flagged for audit due to concerns about fraudulent activity, and it is expected there will be a significant volume of ERC-related criminal cases.

Moratorium on New ERC Claims

On September 14, 2023, the IRS announced a moratorium on processing new ERC claims, effective immediately and continuing indefinitely. The move comes amid growing concerns from tax professionals that scammers are pressuring well-meaning businesses into filing a questionable ERC claim. Further, the moratorium announcement joins prior IRS announcements that the focus of the ERC program is shifting from processing ERC claims for compliance to careful audits and criminal investigations of these predatory ERC promotors.

Withdrawal Procedures for ERC Claims

The IRS also established a special withdrawal process for pending ERC claims. This initiative is aimed at helping businesses concerned about the accuracy of their ERC claims, particularly those who may were misled by aggressive marketing or scams. The withdrawal option allows employers who filed an ERC claim but have not yet received a refund to withdraw their submission and avoid future repayment, interest, and penalties.

Not all businesses will be eligible to withdraw their ERC claim. Most commonly, companies that already filed and received a refund check from the IRS for ERC claims are not eligible to withdraw the claim. This program is only for companies with a pending ERC claim.

Claims that are withdrawn will be treated as if they were never filed, and the IRS will not impose penalties or interest. However, it’s important to note that withdrawing a fraudulent claim will not exempt those involved from potential criminal investigation and prosecution.

If you filed an ERC claim and are now concerned about its accuracy, PilieroMazza recommends reviewing this new withdrawal option with a trusted tax professional. The procedures to withdraw an ERC claim differ based on your current status and how you filed. For more information on how to withdraw your claim, please visit the IRS’s official page on this topic.

Voluntary Disclosure Program

If businesses do not meet the withdrawal criteria, but claimed the credit and are worried about the money received, they should consider applying for the IRS’s Voluntary Disclosure Program (VDP) before the March 22 deadline. In short, this program allows businesses to return 80% of the claimed ERC amount in exchange for the IRS not examining the ERC claim in the future.

Of course, certain eligibility requirements apply to the VDP, and the program is tailored to companies that received an ERC refund but now believe they were entitled to $0. If a VDP application is approved by the IRS, the company is required to:

• voluntarily pay back the ERC, minus 20% (i.e., less than what was received);
• cooperate with any requests from the IRS for more information; and
• sign a closing agreement.

If you claimed and received the ERC, but determined you were ineligible and need to repay the ERC, PilieroMazza recommends reviewing whether a VDP application is right for you and taking immediate action to meet the upcoming March 22 deadline.