In a bold move that has sent shockwaves through the financial world, the IRS has taken a drastic step to curb the influx of dubious Employee Retention Credit (ERC) claims. The tax agency, weary of the rising tide of questionable filings, has pulled the plug on new claims, effectively imposing a moratorium that will extend through the end of 2023. But that’s not all – the IRS is also amping up its scrutiny of existing claims and offering a potential exit strategy for those businesses who may now be questioning the validity of their previous submissions.

Underlying this action is the IRS’s determination to shield businesses from the clutches of aggressive promoters and marketing schemes by cracking down on promoters of those aggressive claims that have ensnared unwitting taxpayers. The stage has been set for a complex and intriguing battle between tax authorities and those seeking to maximize their benefits.

The ERC Background: A Lifeline During the Pandemic

The ERC was initiated by Congress as a response to the economic turmoil brought on by the COVID-19 pandemic. Its purpose was to provide rapid financial assistance to businesses during a time of crisis. To qualify for the ERC, employers had to meet specific criteria based on their experiences during 2020 and 2021. These criteria included facing operational suspensions due to governmental orders, suffering significant declines in gross receipts, or qualifying as recovery startup businesses. The ERC was designed as a refundable tax credit, which allowed businesses to claim it even after the immediate impacts of the pandemic had subsided.

However, as the pandemic ebbed, a new wave of ERC promoters emerged, offering to help businesses navigate the program in exchange for substantial contingency fees, often ranging from 25% to 40%. The result was a surge in ERC claims, but not without accompanying controversies and scams.

Unmasking the Problem: IRS takes Action

IRS Commissioner Danny Werfel ordered a moratorium, effective from September 14, 2023, through at least the end of the year, in response to mounting concerns from within the agency, tax professionals, and alarming reports in the media of the rise of the “unscrupulous” behavior of significant portions of new ERC claims being ineligible due to potential scams orchestrated by aggressive promoters and marketers.

During the moratorium, the IRS will continue to process existing ERC claims, but with a heightened focus on compliance. The processing time for these claims will increase from the standard 90 days to 180 days. If a claim undergoes further review or audit, it could take even longer. Additionally, the IRS may request additional documentation from taxpayers to validate the legitimacy of their claims.

In July 2023 the IRS shifted its attention to ERC claims with compliance concerns, intensifying audits and initiating criminal investigations into promoters and businesses associated with questionable claims. As a result of this action hundreds of criminal cases are already in progress, and thousands of ERC claims have been referred for audits. This action serves a dual purpose of combating fraud while protecting businesses from potential penalties and interest payments stemming from improper claims promoted by unscrupulous individuals.

Safety Measures and Caution for Taxpayers

Taxpayers facing pressure from promoters to file for the ERC are advised by IRS Commissioner Werfel to hold off while the IRS implements new protections and safeguards against fraudulent claims and scam artists during the moratorium. Businesses are being encouraged to consult trusted tax professionals who possess a thorough understanding of the complex ERC rules, rather than relying on promoters seeking hefty contingency fees.

Options for pending ERC applications (https://www.grfcpa.com/resource/irs-stops-employee-retention-credit-processing/)

Businesses who have already filed an ERC claim or intended to file one this year have a few options.

1. For those who have not filed a claim yet, consider reviewing the guidelines and waiting to file – If a business is considering filing a claim, the IRS is urging that business to carefully review the ERC guidelines during the processing moratorium period. Talk to a trusted tax professional – not a tax promoter or marketing firm which earns a commission from the ERC claim. And lastly review the new ERC eligibility checklist to confirm they for qualify for the ERC as many businesses do not qualify for it, and end up with a bad claim which lead to future complications with the IRS.
   
   
2. Businesses can withdraw an existing claim – For those who have filed and have a pending claim, they should carefully review the program guidelines with a trusted tax professional and consult the new checklist. For example, the IRS is seeing repeated instances of people improperly citing supply chain issues as a basis for an ERC claim, but a business with those issues will very rarely meet the eligibility criteria. Under any scenario, if a business claimed the ERC earlier and the claim has not been processed or paid by the IRS, they can withdraw the claim if they now believe it was submitted improperly – even if their case is already under audit or awaiting audit. 

3. Businesses can wait for the IRS ERC settlement program to be finalized – If a business has already received an ERC that they now believe is in error, the IRS will be providing additional details on the settlement program this fall that will allow businesses to repay ERC claims. The settlement program will allow these businesses to avoid penalties and future compliance action. The IRS is continuing to assess options for how to deal with businesses that had a promoter contingency fee paid for out of the ERC payment.

HWA Alliance can help!

Are you navigating the maze of Employee Retention Credits (ERC) and worrying about the recent moratorium? Look no further! At HWA Alliance of CPA Firms, Inc. (HWAA), we’ve got your back!

As ERC claims face increased scrutiny and fraud concerns, having a trusted CPA firm by your side becomes essential. We specialize in deciphering complex tax regulations, ensuring your business’s compliance, and protecting you from potential pitfalls. Let us be your guiding light through the ERC labyrinth. Our expert team understands the intricate ERC rules and can help you make legitimate claims, avoiding the traps of unscrupulous promoters and marketing schemes.

Contact HWA Alliance today, and unlock your ERC potential with confidence! Our dedicated professionals are here to safeguard your financial future and steer you towards success.