By Amy Sandlin, CPA, Tax Senior Manager at Blue & Co.
On Thursday, Sept. 14, the IRS announced a moratorium on processing of new Employee Retention Credit (“ERC”) claims through at least December 31, 2023. This decision is in response to a flood of questionable claims and trusted tax advisors expressing a slew of concerns about aggressive marketing tactics that are luring honest, small business owners into tax “scams.”
This news comes as a welcome relief, as we’ve watched our clients, friends, and family members fall victim to these aggressive marketing tactics. We’ve lost sleep because we’re worried they’ll be penalized, when far more often than not, they’re victims.
This announcement is not a complete surprise (although it may be unprecedented) to those of us who have been following the progression of guidance and warnings from the IRS over the last year. Especially, considering the announcement in July that the IRS was shifting focus to review ERC claims and ramping up audit and criminal investigations.
The IRS is working hundreds of criminal cases, and thousands of ERC claims have been referred for audit.
That may be scary to read, but this announcement also contains the news we have been hoping for. The IRS is working on a repayment settlement program for taxpayers who have made an improper ERC claim. This is something we have long felt was necessary and the right thing to do for victims of ERC scams.
We will provide guidance on the details of this program once it is finalized.
All ERC claims are not created equally.
The Employee Retention Credit was a COVID relief measure that was intended to help small businesses, and there are legitimate ERC claims.
In broad terms, there are two ways a business can qualify.
- You experienced a significant decline in gross receipts.
- You sustained a full or partial suspension of operations.
Whether a claim is likely to be improper depends on the criteria used to justify the claim. For example:
You experienced a significant decline in gross receipts.
These are generally considered to be legitimate, low risk claims and are not the justification used by aggressive credit promoters.
You sustained a full or partial suspension of operations.
These may be improper.
The most aggressive and likely fraudulent ERC claims are those claiming a partial suspension of operations and use “supply chain issues” as justification for the claim.
Red flags you may have filed an improper ERC claim
If you have worked with an ERC preparer who is not a trusted tax advisor, here are some red flags that will help you identify if you potentially filed an improper ERC claim:
- Your ERC claim indicates you were eligible due to “supply chain issues.”
- The ERC preparer refused to sign the ERC return and/or did not provide their identifying information and tax ID.
- You paid large upfront fees to claim the credit.
- Your ERC preparer said things such as “it’s an easy application process,” or ”eligibility can be determined within minutes.”
- You were told you were “eligible” before any discussion or review of the specific facts of your business. The ERC is a complex tax credit and requires detailed analysis to determine
eligibility. A competitor qualifying does not mean you automatically qualify. - The fees were based on a percentage of the ERC refund. All taxpayers should avoid a tax preparer basing their fees on the size of a refund.
- The ERC preparer has disappeared (also known as “ghost preparers”).
- The ERC preparer refuses to provide detailed documents supporting their computations.
⚠️It is important to note that many victims of these ERC scams are also at risk of having their identity stolen by these fraudulent credit preparers.
What you need to do today, depending on where you are in the process of making an ERC claim.
I am considering filing an Employee Retention Credit claim.
Do not do anything until you talk to your trusted tax advisor. Although these aggressive ERC marketing tactics are tempting, trust in the guidance provided by your trusted tax advisor. They know your business best and will be able to advise on your eligibility.
The current deadline to file an ERC claim is:
- April 15, 2024 for 2020 calendar year claims
- April 15, 2025 for 2021 calendar year claims
I already filed an Employee Retention Credit claim, but it has not been processed.
The IRS will continue to process your claim during the moratorium but at a greatly reduced speed. These claims will face additional scrutiny, which will delay the processing time.
Expect extended wait times due to the volume and complexity of the claims.
It is crucial that you maintain all payroll records related to the ERC claim indefinitely.
If you believe you filed an improper claim, you can withdraw your existing claim. Contact your trusted tax advisor if you need guidance on your eligibility and the withdraw program.
Contact your ERC preparer immediately if they did not provide detailed explanation for your eligibility and the computations used to determine the credit.
I already filed an Employee Retention Credit claim, received a refund, and I’m now worried I wasn’t eligible.
Wait for the IRS settlement program to be finalized.
Contact your ERC preparer immediately if they did not provide detailed explanation for your eligibility and the computations used to determine the credit.
I already filed an Employee Retention Credit claim because I experienced a significant decline in gross receipts.
The IRS will continue to process your claim, but plan for the refund to be significantly delayed.
Next Steps
If your ERC preparer did not provide detailed explanation for your eligibility and the computations used to determine the credit, you should contact the preparer immediately and request the documentation.
We have already seen numerous ERC ghost preparers, and this IRS announcement is likely to send fraudulent preparers underground.
Maintain all payroll records related to the ERC claim indefinitely.
This announcement follows much needed guidance on ERC eligibility that has been trickling out over the last few months. We will be analyzing the details of this moratorium announcement in relation to other recent guidance so we can advise you on the best course of action for your circumstances.
We will reach out to you if we are aware that you are in the process of filing or have already filed an improper claim.
In the meantime, please contact us if you have any questions or concerns about your ERC claim.
Editor’s Note
We’ve seen and heard the ads questioning the intelligence of tax advisors and claiming we don’t know the rules for ERC eligibility. But on the contrary, we do know the rules because we read all the notices and warnings and, quite simply, that’s what we do.
We understand what it takes to be a tax advisor worthy of your trust. Our ERC approach was and is the same as our approach to every other tax change and we will continue to bring you the most up-to-date information about this credit.
