For some time, the IRS has cautioned taxpayers about filing false or fraudulent ERC claims. More recently, on September 14, 2023, the IRS issued a News Release, IR-2023-169, indicating that it would no longer process ERC claims from September 14, 2023, through “at least” December 31, 2023. Significantly, this only relates to new ERC claims filed on or after September 14, 2023—however, the News Release suggests that prior ERC claims will be subject to significant delays, while the IRS carefully reviews them. The News Release also provided several other important updates regarding ERCs.
The News Release indicates that the IRS issued the immediate moratorium “[a]mid rising concerns about a flood of improper Employee Retention Credit claims.” It clarifies that the moratorium only applies to newly-filed claims and not claims that have already been filed with the IRS prior to issuance of the News Release on September 14, 2023. However, the IRS indicated that existing claims will be subject to delays “due to . . . detailed compliance reviews.” Because of these stricter reviews, the IRS stated that taxpayers should expect standard processing goal times of “90 days to 180 days,” but much longer if the IRS believes the ERC claim needs further review or audit. The IRS also communicated that processing times may be further delayed to the extent the IRS believes it needs additional documentation from taxpayers to support their ERC claims.
New ERC Settlement Program and ERC Withdrawal Option
The News Release suggests that the IRS will implement two ERC compliance options in the near future: the ERC Settlement Program and the ERC Withdrawal Option.
The ERC Settlement Program is designed to help taxpayer-businesses “who found themselves victims of aggressive promoters.” The program will permit taxpayers the option of making repayments to the IRS of previously issued ERCs. The IRS has indicated that it will provide more details on the ERC Settlement Program in the fall.
The ERC Withdrawal Option applies to taxpayer-businesses who have filed an ERC claim that has not yet been processed—i.e., no ERC refund has been issued to the taxpayer-business. Under this option, the taxpayer-business can effectively waive the refund claim and avoid repayment issues and paying promoter contingency fees (the latter of which are generally based on the IRS issuing an ERC refund).
The IRS cautioned, however, that these options will not necessarily protect taxpayers who filed fraudulent claims or who conspired to file fraudulent claims. In those cases, the IRS indicated that it reserved the right to initiate a criminal investigation and seek prosecution of the taxpayer for the fraudulent or false filing.
Criminal ERC Investigations
As of July 31, 2023, IRS-Criminal Investigation has opened 252 criminal investigations related to over $2.8 billion of potentially fraudulent ERC claims. Of those 252 investigations, 15 have resulted in federal charges already. Incredibly, out of those 15 federal charges, 6 have resulted in convictions with 4 of those reaching the sentencing phase. The average criminal sentence for those who have been sentenced thus far has been 21 months.
The IRS noted that these are only a small fraction of total IRS investigations. On the civil side, the IRS indicated that it has already referred “thousands” of ERC cases for examination.
Taxpayers should take the News Release seriously. The IRS has firmly communicated its stance that it will no longer tolerate fraudulent ERC claims, and it has already set forth demonstrable actions it has taken and will take in the future to shut down these types of claims. Taxpayers who have already filed ERC claims should consult with their tax professionals to determine whether the ERC claims were legitimate or whether there are any risks of IRS challenge. To the extent there are, those taxpayers should consider whether they should participate in the ERC Settlement Program or the ERC Withdrawal Option. If a taxpayer has filed a false or fraudulent ERC claim, the taxpayer should immediately consult with a tax professional to determine whether there are steps that can be taken to mitigate criminal prosecution.