On September 14, 2023, the IRS ceased processing new claims for “employee retention credits” (“ERCs”) until at least the end of 2023 in an effort to combat fraud. Emphasis added.
The IRS has ceased accepting new ERC refund claims.
- The IRS will heavily scrutinize existing ERC refund claims, which will slow down processing.
- The IRS will actively pursue improper ERC claims, both civilly and criminally. (For clarity, not all ERC refund claims were fraudulent or incorrect, but this tax program is under significant scrutiny due to these concerns.)
- In my opinion, these cases can be relatively straightforward cases for the IRS to prove.
- The IRS will introduce initiatives for taxpayers to rectify their improper ERC refund claims.
Relevance to You or Your Company:
- If you or your company recently filed for an ERC refund, strongly consider having your ERC refund claims reviewed by a third party (we can assist), or consider withdrawing the ERC refund claim when the IRS introduces an initiative to withdraw pending ERC claims.
- If you or your company has already received an ERC refund, it is advisable to have your ERC refund claim reviewed by a third party (again, we can assist). Once the IRS ERC refund settlement initiative is introduced, if applicable, consider participating and repaying your ERC refunds to the Department of Treasury.
- Participating in this program could potentially mitigate greater exposure related to improperly claimed ERCs if the IRS audits you or your company.
- If you or your company are acquiring entities that have obtained or are claiming ERC refunds, it is important to review such ERC refund claims or ERC refunds. This review is important for negotiating mitigation of potential liabilities that you or your company may inherit from such entity due to improperly or fraudulently claimed ERCs.
- As a side note, I have yet to see a taxpayer amend their 2020 and 2021 tax returns to reduce their employment expense deductions by the amount of the ERCs they claimed (and for which they received refunds). According to IRS guidance, this adjustment should have been made. If you or your company claimed ERCs, you or your company should confirm that the affected tax returns have been properly filed or amended.
ERCs were introduced as part of the CARES Act 2020. The ERCs are refundable credits to qualified businesses. These credits amounted to either $5,000 (for ERCs claimed for the tax year 2020 – the $5,000 ERC refund being the maximum amount refundable to a taxpayer per employee for tax year 2020) or $7,000 (for ERCs claimed for the tax year 2021 per quarter – a potential maximum of $28,000 per employee for all of tax year 2021). The qualification criteria for ERCs are based on either a clear-cut objective test or a subjective test. Like many tax programs, the ERC program is intricate.
Proliferation of ERC “Advisors” and ERC Marketing
Many of you might have noticed a surge in advisors vigorously marketing their services on TV to assist with ERC refund claims. For instance, one commercial features Ty Burrell, known for his role as the father (Phil Dunphy) on the hit TV show “Modern Family,” suggesting viewers seek a second opinion regarding their eligibility for ERCs. Such advertisements from advisors have been airing for at least a year, leading numerous businesses to apply for ERCs.
Increase in ERC Filings
According to an IRS news release, from the enactment of the CARES Act 2020 up to September 14, 2023, approximately 3.6 million ERC refund claims were filed. The IRS processed these claims in under 90 days prior to September 14, 2023. However, as of that date, the IRS still had over 600,000 pending ERC refund claims. This means roughly 16.7% of all ERC refund claims were filed in the last three months. To put this in context, in the 1,266 days since the CARES Act 2020 was enacted, approximately 16.7% of taxpayers' ERC refund claims were filed in just the past 90 days, which is approximately 7% of the total time the credits have been available for claim.
IRS Concern and Action
Danny Werfel, the IRS Commissioner, stated, “[t]he IRS is increasingly alarmed about honest small business owners being scammed by unscrupulous actors, and we [the IRS] can no longer tolerate the growing evidence of questionable claims pouring in.”
- No new ERC filings will be accepted until at least January 1, 2024.
- The IRS will continue to process the previously mentioned 600,000+ filed but unprocessed ERC refund claims. However, the processing time may extend to 180 days or longer.
- For these claims, the IRS may also request additional documentation to ensure the ERC refund claim is legitimate.
- The IRS will offer an option for taxpayers to withdraw unprocessed ERC claims. a. This option will not protect taxpayers who willfully filed fraudulent claims or conspired to do so. Such taxpayers could face criminal investigation and prosecution.
- The IRS will introduce new initiatives to assist businesses that were misled by aggressive promoters and erroneously filed for ERC refunds and received payments. These initiatives will include a settlement program for the repayment of ERCs for those who received an improper ERC payment. Details on this program will be released this fall.
The IRS Criminal Investigation Unit has launched 252 investigations into potentially fraudulent ERCs. Out of these investigations, 15 have led to federal criminal charges. Six of these 15 cases have resulted in convictions, with four reaching the sentencing phase. The average jail sentence currently stands at 21 months. In summary, there is a potential for criminal charges and imprisonment for improperly claimed ERCs, and taxpayers should approach this matter with utmost seriousness.