IRS Slams Door on ERC Refunds – For Now
If you are in business, chances are very good that you have been inundated with marketing materials claiming you likely are eligible for thousand of dollars in tax refunds from the IRS for claiming what's known as the Employee Retention Credit (ERC). Hardly a week (and sometimes a day) has gone by in recent memory that we didn't have someone contacting our firm about something they received about this and asking why we didn't tell them about this "free money".
Well, there is a reason for that, and it's because in the vast majority of cases, the business didn't meet the eligibility requirements to file a claim for the credit. The situation has gotten so out of control and the ERC program so rife with fraud that the IRS announced September 14 that it was taking the unprecedented step of immediately implementing a moratorium on processing new ERC refund claims!
To give you a quick back story, during the Covid-19 pandemic, Congress passed into law a generous credit that businesses could claim on their payroll tax returns for keeping their people employed if they met certain criteria. Probably the most common qualification was that the business had suffered a certain percentage decline in gross receipts in a calendar quarter of 2020/2021 as compared to pre-pandemic levels. Hundreds of thousands of businesses legitimately qualified and applied for the credit.
The gross receipts test was just one of the possible eligibility triggers, but certainly was the one most objective and measurable. Other triggers were a bit more subjective (I call it squishy), such as a business suffering due to supposed government mandated shutdowns and supply chain issues.
Aggressive marketers and even scam artists thus saw their opportunity and began pushing a narrative that made it seem as if virtually all businesses could qualify based on very distant or theoretical connections to these "squishy" criteria, and that doing so was "risk free". And of course, these players would file your claim for you for a contingency fee of up to 25%!
Sadly, many honest but unsuspecting business owners took the bait, and hundreds of thousands of fraudulent claims are believed to have been filed. As of July 31, 2023, the IRS has initiated investigations involving over $2.8 billion in possibly fraudulent ERC claims. Further, the pace of filings has dramatically increased in recent months, with the IRS seeing instances where 95% or more of claims are ineligible as promoters continue to aggressively push people to apply regardless of the rules.
The result? IRS Commissioner Danny Werfel ordered the immediate moratorium to run through at least December 31. Werfel says the IRS will continue to work claims received prior to the moratorium and that refund payouts will also continue, albeit at a slower pace due to more extensive and detailed compliance reviews, calling the enhanced compliance reviews "critical to protect against fraud but also to protect the businesses from facing penalties or interest payments stemming from bad claims pushed by promoters."
Werfel added, "For those people being pressured by promoters to apply for the Employee Retention Credit, I urge them to immediately pause and review their situation while we look to add new protections and safeguards to stop bad claims from ever coming in. In the meantime, 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. The moratorium will help protect taxpayers by adding a new safety net onto this program to focus on fraudulent claims and scammers taking advantage of honest taxpayers."
Other aggressive steps the IRS is taking against fraudulent claims for the ERC include allowing taxpayers to withdraw unpaid claims and the offer of a settlement program for those who have already received an ERC that they now believe is in error. Details about both of these steps are still forthcoming.
