IRS Stoppage of Employee Retention Claims Raises More Questions

The popular employee retention tax credit is now on hold, as the IRS investigates hundreds of criminal cases and conducts audits of thousands of claims related to the program created in 2020 to help US businesses and employees stay afloat during the Covid-19 pandemic.

As the IRS works to root out ERC fraud, businesses that claimed the credit or had planned to claim it are looking for answers. Three tax professionals from different areas of the tax world offer their perspectives on what businesses should know and do in the wake of the IRS’ announcement.

Kristin Balding Gutting from FORVIS says its time for businesses to examine both old and new ERC claims; Sunshine Chapman of ERC Provider says the IRS’s pause shouldn’t discourage businesses from filing legitimate claims; and Joshua Hamlet of Akerman says businesses should use the agency’s stoppage to consult with a trusted tax professional.

Examine the Old and the New

Kristin Balding Gutting, FORVIS

The IRS’s moratorium on processing new employer retention credit claims means now is the time for employers to reexamine their claims and proceed prudently with filing new ones. New claims won’t be processed until at least 2024, but the IRS is warning taxpayers to use the moratorium to review any claim before filing.

The IRS will continue processing previously filed ERC claims but will increase its focus and efforts on reviews, including “intensifying audit work and criminal investigations on promoters and businesses filing dubious claims.” Meaning, employers that have been waiting for their ERC claims to be processed can anticipate an even longer wait, additional IRS scrutiny, and the IRS seeking additional documentation.

If an employer determines that its ERC claim is improper, the IRS will be providing details soon regarding two remedial options. For employers that haven’t received their ERC refund, the IRS will be releasing a special method for withdrawing a claim, including claims under audit. Alternatively, for an employer that has received its ERC refund, the IRS will be releasing a settlement program allowing an employer to repay improperly received ERC refunds without a penalty. But it’s unclear if the IRS will provide any concessions on interest payments.

In light of the IRS warning and the remedial options on the horizon, the agency recommends employers consult with “a trusted tax professional who actually understands the complex ERC rules, not a promoter or marketer hustling to get a hefty contingency fee.” Remember, if the ERC claim seems too good to be true, it might be what the IRS is warning about.

A Pause, Not an Ending

Sunshine Chapman, ERC Provider

The IRS notice announcing a moratorium on processing new ERC filings has prompted a lot of confusion, misunderstanding, and misrepresentation. The announcement doesn’t signal the closure of the program—the IRS is pausing the processing of new ERC filings as a short-term measure.

This IRS’s decision stems from its intent to bolster its internal systems to detect fraudulent claims. The notice doesn’t say the IRS will pause accepting claims; it says it will pause processing claims.

There’s a big difference between those two notions, and any additional scrutiny of ERC filings and promoters is welcome. We’re hopeful that this dramatic announcement will scare away ERC mills that aren’t properly calculating the credit.

A big issue, however, is the misguided idea that most filings coming in at this time are ineligible. In our experience working with business owners, it’s the complete opposite. Cautious and prudent people have been watching and waiting, and researching ethical and competent providers who can help them legitimately claim the credit.

Many of the business owners we work with fit this description. Penalizing responsible people who chose to conduct due diligence before filing for the ERC in accordance with the law by delaying the payment of their claims doesn’t seem fair.

Even though the IRS has paused processing new returns, we’ll continue to help businesses determine their eligibility with the ERC claims process. We’re always looking for how to spot and avoid bad actors who cut corners and make unrealistic promises. We hope that now that the IRS is stepping in, it will issue clear and strict guidelines for how to properly claim the ERC, as well as which companies taxpayers can trust to do this work.

The ERC benefits all types of companies, but it’s easy to get confused by misinformation and the glut of advertising. Additionally, some unscrupulous and incompetent firms are looking for fast money regardless of the ramifications to business owners.

The ERC can have a huge impact on deserving but beleaguered businesses trying to pull out from the devastating economic impact of the last few years. Before the window closes, eligible business owners should be empowered to claim this ERC refund with confidence.

Making the Most of the Moratorium

Joshua Hamlet, Akerman

The IRS will continue to process ERC claims that were filed prior to the processing moratorium, “but at a greatly reduced speed.” Previously, the IRS’s standard processing goal for a claim was 90 days, but due to the backlog and the complex nature of these filings, the processing times may take 180 days or more.

On July 24, the Department of the Treasury and the IRS released final regulations that authorize the assessment of any erroneous refund of the tax credits paid under Section 2301 of the CARES Act, which originally authorized the ERC as part of relief during the Covid-19 pandemic. The final rules will treat any erroneous tax credits as underpayments, which may result in substantial penalties and interest. The IRS has stated, “A business or tax-exempt group could find itself in a much worse cash position if it has to pay back the credit than if the credit was never claimed in the first place.”

The IRS is preparing details on a settlement program that’s set to be available in the fall that will allow businesses to come forward to avoid penalties and future compliance action. The IRS also noted that it’s assessing options on how to address situations in which a business had a promoter contingency fee paid for out of the ERC payment.

For those whose claims haven’t yet been processed or paid but now believe that it was submitted improperly, the claimant can withdraw their existing claim, although the IRS hasn’t yet released details on how that process will work.

Any claims filed as of Sept. 14 won’t begin to be processed until at least Jan. 1, 2024, but businesses may continue to file in the meantime. However, the IRS urges businesses to carefully review the ERC guidelines, the updated frequently asked questions, and the new eligibility checklist during the moratorium period.

Unfortunately, taxpayers with legitimate claims will have to wait while the IRS catches up on the backlog of claims. Those who have already claimed the credit or plan to should gather the records specifically requested by the IRS in the event of an audit, as certain documentation—particularly for those who claim their business operations were suspended by a governmental order—may later be difficult to locate.

As urged by the IRS, businesses should use this time to talk to a trusted tax professional before filing for the ERC. This may involve guidance from both a tax attorney to determine eligibility and an accountant to calculate the credit and prepare the return.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Kristin Balding Gutting is a principal at FORVIS, where she leads the firm’s tax controversy and procedure Group.

Sunshine Chapman is president and founder of ERC Provider, which helps businesses navigate the details and realize the benefits of the ERC program.

Joshua Hamlet is an associate in Akerman’s tax practice and focuses on state and local, international, and federal taxation matters.