The IRS continues to pound the table with its most recent press release on employee retention credit (ERC) claims. On September 14, 2023, the IRS announced a moratorium on processing new ERC claims until at least 2024. It wants to “protect against fraud but also to protect the businesses from facing penalties or interest payments stemming from bad claims pushed by promoters.”
Although a processing moratorium of this type is highly unusual for the IRS, if not unprecedented, one could view this as little more than the IRS raising the temperature on promoters and false claims. This is because the IRS has about 600,000 claims in its processing queue, and at current processing rates – about 40,000 claims per week, it is not likely to get to newly filed claims until 2024 anyway.
Two New IRS Initiatives for ERC Claims
The release also announced two important IRS initiatives that will be released in the coming months. The first is that the IRS is working on a settlement program for the repayment of improper ERC claims. The success of this type of program will depend on the details, all of which are unknown at this time. The press release states only that it will allow “businesses to avoid penalties and future compliance action.”
The second initiative would provide a withdrawal option for taxpayers who have filed an ERC claim but have not been processed. This option will allow taxpayers to avoid possible repayment issues and paying promoters contingency fees, and it is expected to include all 600,000 of the claims in the IRS’s processing queue. Importantly, though, withdrawing an ERC claim under this program would not exempt taxpayers from potential criminal exposure if they filed a fraudulent claim.
Speaking of fraud, the IRS noted that it has already charged 15 taxpayers with fraud, and so far, six have resulted in convictions, and four of the convictions have reached the sentencing phase, where the average sentence is 21 months.
The IRS has received approximately 3.6 million ERC claims to date and has paid out about three times more than Congress budgeted for the program when it was enacted. The IRS stated that it is working on hundreds of criminal cases, and thousands of ERC claims have been referred for civil audits. It is also working with the Justice Department to address fraud as well as promoters who have been ignoring the rules and “pushing businesses to apply.”
The press release also included a warning to taxpayers by the Commissioner of the IRS, Danny Werfel:
For those people being pressured by promoters to apply for the [ERC], I urge them to immediately pause and review their situation while we look to add new protections and safeguards to stop bad claims from ever coming in. In the meantime, businesses should seek out a trusted tax professional who actually understands the complex ERC rules, not a promoter or marketer hustling to get a hefty contingency fee.
We agree that pausing to consider the merits of a claim is not a bad idea. However, we are still encouraging businesses with valid ERC claims to file them as soon as possible because the statute of limitations is not too far off. For 2020 ERC claims, the filing deadline is April 15, 2024, and for 2021 ERC claims, the filing deadline is April 15, 2025. The IRS has not sought to stop the filing of meritorious claims; rather, it is seeking only to halt the filing of false claims.
For businesses with questionable claims, however, we agree with the IRS that seeking a qualified tax professional with deep expertise in the ERC is advisable. This second look may prove invaluable when deciding whether to proceed with or to withdraw a previously filed claim, especially in light of the forthcoming IRS initiatives discussed above.
The ERC team at Withum has significant experience preparing ERC claims and has represented taxpayers in more than 40 IRS audits. We have also worked with counsel on dozens of matters to assess the appropriateness of ERC calculations prepared by tax credit shops on behalf of businesses.