The IRS will take several aggressive steps against fraudulent claims for the employee retention credit (ERC), including an immediate moratorium on the processing of new ERC claims; allowing taxpayers to withdraw unpaid claims; and the offer of a settlement program for those who have received the pandemic-era benefit intended to help small businesses.
The actions are aimed at stopping fraud by promoters in ERC mills, who promise to help small businesses obtain the credit, typically in return for a contingency fee based on the size of the credit, while giving a break to the taxpayers who have fallen prey to the unscrupulous ERC promoters. So far, the IRS has paid $230 billion in ERC claims, an IRS representative said.
The moratorium on processing new claims began immediately and will continue through at least the end of 2023, IRS Commissioner Danny Werfel said in a call with reporters Thursday. The actions are being taken to protect the small businesses that the ERC was designed to help, he said. The IRS will continue to process ERC claims filed before Thursday, but at a slower pace due to stricter compliance reviews.
The ERC “was not designed to be a gravy train for promoters flooding the IRS with ineligible applications that slows down work on ERC and other important matters for taxpayers,” he said.
The ERC was a refundable tax credit for businesses that paid workers during the COVID-19 pandemic while their operations were fully or partially suspended because of a government order or for those that had a significant decline in gross receipts during the eligibility period.
The IRS will provide details later about how a taxpayer can withdraw an ERC claim, an option that will be available to the filers of more than 600,000 claims awaiting IRS review. This withdrawal option will allow the taxpayers to avoid possible repayment issues and keep them from having to pay contingency fees to promoters, the IRS says.
The IRS also is working out details of the settlement initiative that will allow taxpayers to repay a claim that they erroneously received and avoid penalties and future compliance action. The Service promises more details on how this program will work in the fall.
Werfel said that, with the country at least two years removed from the height of the pandemic, the IRS believes it should see “only a trickle” of employee retention claims coming in. “Instead, we are seeing a tsunami,” he said.
The IRS has received 3.6 million ERC claims, and of the 600,000 of them (15%) currently unprocessed by the IRS, virtually all were filed in the past 90 days, he said. The ERC was available from March 31, 2020, to Sept. 30, 2021, with a deadline of Dec. 31, 2021, for recovery startup businesses.
“We are deeply concerned that this program is not operating in a way it was intended,” Werfel said. “This great program to help small businesses had been overtaken by aggressive promoters. The ads are everywhere. The program has become the centerpiece for unscrupulous marketing that profits from pushing taxpayers to claim credit that they may not be eligible for at the IRS and across the nation’s tax professional community. We all fear that too many honest small businesses are being put at financial risk for the benefit of these aggressive promoters. We must do more to protect innocent small businesses from being victimized. We cannot let that continue.”
In addition, the ERC claims still waiting for IRS review will receive a more intensive review, Werfel said. Instead of taking 90 days, the reviews will take 180 days. That time frame will be extended for claims that raise red flags, he said.
The IRS also is working with the Justice Department to address fraud in the ERC program as well as promoters who ignored the rules and pushed businesses to apply.
As of July 31, the IRS Criminal Investigation Division has initiated 252 investigations involving more than $2.8 billion of potentially fraudulent ERC claims, with 15 of the 252 investigations resulting in federal charges, Werfel said. Six of those 15 have resulted in convictions. In addition, the IRS has referred thousands of ERC claims for examination.
Werfel encouraged businesses to “rely on a tax pro for help, not a promoter, because the promotion of this credit has created a real challenge across the tax community. This initiative today reflects that the IRS is on the side of taxpayers.”
AICPA president and CEO Barry Melancon, CPA, CGMA, said the IRS initiative “takes a multi-pronged approach to taper ERC fraud by further scrutinizing ERC claims already received, pausing the processing of additional claims, and defining processes for taxpayers to handle claims they now feel are in error. While drastic, these measures are necessary to protect small businesses by putting a stranglehold on the unscrupulous ERC practices of credit mills.
“We are pleased with the IRS’s announcement of the additional measures they are taking to push back against the dishonest credit mills taking advantage of unsuspecting small businesses. While there are still valid claims to be processed, these bold measures are necessary to combat widespread ERC fraud,” he said.
The AICPA has provided ERC resources and information to its members so they can warn their clients of red flags that could indicate that a vendor is dishonest and discourage dealings with these ERC mills. Among the warning signs, businesses should be wary of vendors that require large, upfront contingency fees and those who fail to sign the amended payroll tax returns.
The IRS has a flowchart to help taxpayers determine whether they are eligible for the ERC. The flowchart includes questions such as:
- Did you have employees and pay wages to them between March 13, 2020, and Dec. 31, 2021?
- Was the operation of your business or organization fully or partially suspended by a government order due to the COVID-19 pandemic during 2020 or the first three calendar quarters (January through September) of 2021?
- Did your trade or business experience a significant decline in gross receipts during the eligibility periods during 2020 or the first three calendar quarters of 2021?