In a surprising move, the Internal Revenue Service (IRS) recently announced an immediate halt to the processing of new Employee Retention Credit (ERC) claims, citing suspicions of fraudulent activity and the sheer volume of claims submitted.
Background to the ERC
The ERC was introduced as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020. It was designed to provide financial relief to eligible employers affected by the pandemic, encouraging them to keep employees on their payroll. Initially, the ERC was set to expire at the end of 2020, but subsequent legislation extended its availability through 2021.
The ERC offered a tax credit of up to 50% of qualified wages paid to employees, with a maximum credit of $5,000 per employee. To be eligible, businesses needed to meet specific, strict criteria, including experiencing a significant decline in gross receipts or being subject to government-ordered closures due to COVID-19.
The Surge of Questionable Claims
While the ERC was undoubtedly a lifeline for many businesses, its implementation also brought about some unintended consequences. The surge of questionable claims has raised concerns about potential fraud and misuse of this relief program. Indeed, newly appointed IRS commissioner Danny Werfel recently noted that as many as 600,000 new claims were filed in the past three months, mostly due to aggressive marketing and outright scam artists preying on unsuspecting taxpayers.
Some common issues that have come to light include:
- PPP & ERC Confusion: Some businesses have applied for both the Paycheck Protection Program (PPP) loans and the ERC, which was not initially allowed. While subsequent legislation did permit this, it led to confusion and the potential for overpayments.
- Inaccurate Revenue Declines: Calculating the decline in gross receipts accurately can be complex, and some businesses may have misinterpreted or manipulated the figures to qualify for the ERC improperly.
- Ever Evolving Legislation: The ERC underwent several changes and extensions both during and after the pandemic, leading to confusion regarding which version of the credit applied to specific periods.
- Questionable Eligibility: Some companies that did not experience a significant decline in gross receipts or were not subject to government-ordered closures have applied for the ERC, raising suspicions of eligibility fraud.
The IRS’s Response
To address these concerns and safeguard the integrity of the ERC program, the IRS announced a temporary pause on processing new claims. This halt in processing began on September 14, 2023, and is expected to last until the end of the year. During this period, the IRS aims to review and improve its systems to prevent fraudulent claims and ensure that the credits are distributed to those who genuinely need them.
NOTE: Since the processing of claims is expected to begin again at the start of 2024, it’s important to file sooner than later to get your place in line.
The IRS also indicated that during this moratorium that it will increase its scrutiny of claims, implementing stricter verification processes and conducting audits on businesses that received the ERC. This move is intended to identify and rectify any fraudulent or inaccurate claims while allowing legitimate applicants to receive the relief they are entitled to.
What Businesses Should Do
If you are a business owner who is considering filing an ERC claim, the IRS recommends that you:
- Review the ERC eligibility requirements carefully.
- Gather all supporting documentation before submitting a claim.
- Work with a qualified tax professional to ensure that your claim is accurate and complete.
If you have already submitted an ERC claim, you should monitor your mail and IRS account for any updates. The IRS may contact you to request additional information or to schedule an audit.
Impact on Businesses
The IRS’s decision to halt ERC processing is a significant development for businesses that are relying on this relief program. The pause in processing is expected to create a backlog of claims, which could delay payments to eligible businesses. Additionally, the increased scrutiny of claims and audits could place an additional burden on businesses.
The IRS’s decision to halt ERC processing is a reminder that businesses should be cautious when filing for any type of government relief. It is important to understand the eligibility requirements and to provide accurate information on your application. Businesses should also be prepared for increased scrutiny of their claims and audits.
In addition to the above, here are some other thoughts on the impact of the IRS’s decision to halt ERC processing:
- Potential for financial hardship: For businesses that are relying on the ERC to offset payroll costs, the delay in payments could lead to financial hardship. This is especially true for small businesses with limited cash reserves.
- Increased uncertainty: The IRS’s decision to halt ERC processing has created uncertainty for businesses about the future of the program. This uncertainty could make it difficult for businesses to plan for their future.
Contact us today to learn more about the ERC status and determine your eligibility!