Responding to concerns about extensive fraud and scams involving the Employee Retention Credit (ERC), the Internal Revenue Service (IRS) has stopped processing new ERC claims, published updated frequently asked questions regarding eligibility and announced a settlement program for repayments.
The scale of alleged ERC fraud is striking. To date, IRS Criminal Investigation has initiated over 250 investigations involving $2.8 billion of potentially fraudulent claims, the IRS announced.
These developments should serve as a caution both to businesses that are planning to claim the ERC credit and those that claimed the credit and now doubt their eligibility. These taxpayers should review IRS guidance and consult a qualified professional to carefully consider their next steps.
IRS Stops Processing New ERC Claims
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 health crisis or that experienced a significant decline in gross receipts in 2020 and 2021. Employers claim the credit on Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund.
On September 14, 2023, the Internal Revenue Service (IRS) announced that it would immediately stop processing new Forms 941-X that claim the ERC to protect businesses from scams. The moratorium will run through at least December 31, 2023 while the IRS adds additional safeguards to prevent future abuses of the credit and develops procedures that subject claims to stricter compliance reviews. The decision is in response to rampant fraud as tax professionals and the IRS continue to see ineligible businesses claim the ERC amid aggressive tactics from promoters.
While the IRS will continue to process claims that were filed before the moratorium, processing times will be slower as the agency focuses on whether businesses meet eligibility criteria. Businesses that already filed an ERC claim should expect to wait at least 180 days before the IRS processes their claim. Additionally, the IRS revealed that hundreds of criminal cases are under investigation and thousands of ERC claims have been referred for audit.
IRS Commissioner Danny Werfel stated that “Businesses should 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.”
Update on Criminal Investigations
The first known criminal charges related to the ERC were returned by a Utah grand jury in February 2023, which we wrote about here. Since then, the IRS Criminal Investigation unit has initiated more than 250 investigations involving more than $2.8 billion in potentially fraudulent ERC claims. Fifteen investigations have resulted in federal criminal charges with six convictions so far. The average sentence related to ERC fraud is 21 months. The IRS is working closely with the Justice Department to address fraud in the ERC program by identifying claims with the greatest risk of fraud and referring those claims along with promoters of fraudulent claims for potential prosecution.
Repayment and Withdrawal Programs
The IRS is developing a settlement program for businesses that received an improper ERC payment whereby they can repay the credit. Additional details on the program are scheduled to be released this fall, but the program will allow taxpayers to avoid penalties and future compliance action. The IRS is also finalizing details of a special withdrawal option for the more than 600,000 businesses that filed an ERC claim but have not yet received payment and for taxpayers that are under audit or awaiting audit. The program may help businesses avoid repayment issues and paying contingency fees to promoters. However, the agency noted that withdrawing a fraudulent claim will not exempt taxpayers from potential criminal investigation and prosecution if the taxpayer willfully filed a fraudulent claim or conspired to do so.
Updated Frequently Asked Questions and Eligibility Checklist
In conjunction with the announcement, the IRS issued updated frequently asked questions that address eligibility for the ERC and emphasize that not every business will qualify. The FAQs include a new section warning about ERC scams, the hallmarks of ERC promoters, how to protect your business from a promoter, and how to report ERC fraud. The IRS also published a separate alert reminding businesses to beware of promoters who mislead people into making improper ERC claims.
To help taxpayers understand if they qualify for the ERC, the IRS also published an eligibility checklist.
In response to rampant ERC fraud and aggressive tactics by ERC promoters the IRS has halted processing new ERC claims through at least the end of the year and will subject already filed claims to increased scrutiny. The September 14, 2023 announcements represent a significant step forward in the IRS’ effort to prevent future ERC fraud and to identify and punish businesses and promoters who have engaged in ERC fraud.
Businesses that are considering filing an ERC claim are advised to heed the IRS’ advice, thoroughly review their ERC eligibility, and consult with a trusted tax professional before claiming the credit. Businesses that already claimed the ERC but now doubt their eligibility should consult legal counsel before they are contacted by the IRS.