On September 14, 2023, the IRS announced an immediate moratorium on processing new Employee Retention Credit (ERC) claims due to the surge in questionable or potentially fraudulent filings. According to the announcement, the pause will continue through the end of 2023. The IRS will continue to process claims filed prior to the announcement, but processing times are delayed due to increased vigilance against fraud, and the IRS may require additional documentation from claimants to ensure legitimacy.
What you need to know:
- The IRS has suspended its processing of Employee Retention Credit tax refund claims due to a large number of unscrupulous advisors encouraging invalid claims.
- Businesses that have filed Employee Retention Credit tax refund claims, especially based on the advice of advisors who are not tax lawyers or accountants, should review their claims to be sure they complied with the law.
- Even with the processing moratorium, businesses that are eligible for refunds based on the Employee Retention Credit should consider making filings before the applicable deadline to make refund claims, but they should be aware that those refund claims will be subject to heightened IRS scrutiny.
The ERC is a pandemic-era credit that was designed to help keep employees on payroll while businesses were shut down due to COVID-19-related government orders. The ERC has earned its reputation for being confusing and possibly “too good to be true,” in large part thanks to third-party promoters preparing credit claims for ineligible businesses and claiming a steep fee — in most cases a portion of any refund received — even if the refund is ultimately clawed back. Some promoters promise big pay-outs without conducting the requisite analysis to determine eligibility. The moratorium comes on the heels of reports that the IRS is investigating $2.8 billion of potentially fraudulent ERC claims. Thousands of ERC cases are being referred for audit, and hundreds have been referred to the criminal investigation unit. The IRS has also included fraudulent ERC claims on its “Dirty Dozen” list of tax scams in 2023.
Despite the moratorium and concerns of fraud or aggressive promoters, businesses should still file ERC claims if they are eligible — and they should do so before the statute of limitations expires. Work with a trusted advisor to conduct a comprehensive review for eligibility. At a minimum, an advisor should inquire about and provide a written analysis of the eligibility rules (interpretation of the government shutdown mandate or decline in gross receipts requirements), aggregation rules, related party wages, and limitation on benefits when claims were made under other programs (such as PPP loan forgiveness). Read engagement terms carefully, particularly fee provisions and limitations on the promoter’s liability in the event that a claim is denied or a refund audited.
The IRS has indicated that it will announce a settlement program this fall to help victims that may have been misled into filing inappropriate ERC claims.
Linked here are the important deadlines for both claiming the ERC and the statute of limitations for the IRS to audit your claim. In addition to assessment options, the IRS has the right to litigate erroneous refund claims. Note that the Treasury Department’s 2024 Greenbook includes a proposal to extend the special five-year statute of limitations on assessments to all periods for which the ERC could be claimed. Other events may affect the statute of limitations listed below; please consult with your tax professional about your specific circumstances. The dates in the table linked above are subject to change if legislation is passed to enact the Greenbook proposal.