Citing “rising concerns about a flood of improper Employee Retention Credit claims,” the IRS has announced an immediate moratorium on processing new ERC claims. The agency says that the pause, which will run through through at least the end of the year, is intended to protect honest small business owners from scams. No new claims will be reviewed or processed until early 2024.
“We assumed we’d see a trickle,” IRS Commissioner Danny Werfel said, referencing the timing of the claims. “We are seeing a tsunami.”
The numbers bear that out. To date, the IRS has received 3.6 million ERC claims. The open inventory currently includes about 600,000 returns—most of those were received in the last 90 days. That represents 15% of all ERC claims since the program opened.
Werfel ordered the immediate moratorium, beginning today, to run through at least Dec. 31 following growing concerns inside the tax agency and from tax professionals, as well as media reports, that a substantial share of new claims from the aging program are ineligible. The fear from tax pros is that businesses are being pressured and scammed by aggressive promoters and marketing, and are therefore making improper ERC claims that could put them at financial risk.
Existing Claims Delayed
The IRS will continue to work on previously filed ERC claims received before the moratorium. Payouts for these claims will continue during the moratorium period, but at a slower pace due to the detailed compliance reviews. That means existing ERC claims will go from a standard processing goal of 90 days to 180 days—and much longer if the claim faces further review or audit. The IRS may also seek additional documentation from the taxpayer to ensure it is a legitimate claim.
Werfel stressed that this enhanced compliance review of existing claims in the pipeline is critical to protect against fraud. Additionally, the agency is concerned about businesses that might face penalties or interest payments stemming from bad claims pushed by promoters. He noted that it’s been over two years since the original program dates (the program applies to tax quarters in 2020 and 2021), and “we are deeply concerned that this program is not operating in the way it was intended.”
IRS Stance
“The IRS is increasingly alarmed about honest small business owners being scammed by unscrupulous actors, and we could no longer tolerate growing evidence of questionable claims pouring in,” Werfel said. “The further we get from the pandemic, the further we see the good intentions of this important program abused. The continued aggressive marketing of these schemes is harming well-meaning businesses and delaying the payment of legitimate claims, which makes it harder to run the rest of the tax system. This harms all taxpayers, not just ERC applicants.”
“For those people being pressured by promoters to apply for the Employee Retention Credit, 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,” Werfel said. “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. Businesses that receive ERC payments improperly face the daunting prospect of paying those back, so we urge the utmost caution.”
Taxpayers Currently Awaiting An ERC Claim
For those who currently have an ERC claim on file, the IRS will continue processing these claims during the moratorium period but at a reduced speed due to the complex nature of these filings and the need to protect businesses from being improperly paid. The IRS cautions that many applications will face additional scrutiny, which means the payments could take longer to process.
Due to the large volumes and the need for compliance checks to protect against fraud, the IRS cannot expedite individual claims. The IRS believes many of the applications currently filed are likely ineligible, and tax professionals note anecdotally that they are seeing instances where 95% or more of claims coming in recent months are improper as promoters continue to aggressively push people to apply regardless of the rules.
Taxpayers Who Haven’t Yet Filed A Claim
For those considering filing a claim, the IRS urges businesses to carefully review the ERC guidelines during the processing moratorium period. The IRS urges businesses to talk to a trusted tax professional—not a tax promoter or marketing firm looking to make money. A careful review of the rules will show that many businesses do not qualify for the ERC, and avoiding an improper claim will avoid complications with the IRS.
Taxpayers Who Submitted Questionable Claims
For those taxpayers who have filed and have a pending claim, they should carefully review the program guidelines, ideally with a trusted tax professional. If a business has previously claimed the ERC 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. Those who have willfully filed fraudulent claims or conspired to do so should be aware, however, that withdrawing a fraudulent claim will not exempt them from potential criminal investigation and prosecution. More details will be available shortly.
The IRS is finalizing details that will be available soon for a special withdrawal option for those who have filed an ERC claim, but the claim has not been processed. This option—which can be used by taxpayers whose claim hasn’t yet been paid—will allow taxpayers to avoid possible repayment issues and paying promoters contingency fees. Filers of the more than 600,000 claims awaiting processing will have this option available.
Taxpayers Who Have Already Received An Erroneous ERC Payment
The IRS is working on several initiatives, including one for taxpayers who have already received an ERC payment that they now believe is in error. This includes a settlement program that will allow businesses to return improper ERC payments. You can thank your tax pros for this one—Werfel noted that this option was raised by tax professionals concerned about clients who might have been pressured by ERC promoters into submitting improper claims. More details will be available this fall.
The IRS also continues to assess options for dealing with businesses with a promoter contingency fee paid out of the ERC claim.
Fraudulent Claims
IRS Criminal Investigation (IRS-CI) is actively working to identify fraud and promoters of fraudulent claims for potential referral for prosecution to the Justice Department. As of July 31, 2023, IRS-CI has initiated 252 investigations involving over $2.8 billion of potentially fraudulent ERC claims. Of those, 15 investigations have resulted in federal charges. Of the 15 federally charged cases, six matters have resulted in convictions to date—four of those cases have reached the sentencing phase, with the average sentence being 21 months.
“This work taking place includes promoters,” Werfel said, referring to what he called “unscrupulous marketers” that push taxpayers to apply for credits they may not be entitled to receive.
“The ads are everywhere,” Werfel observed. Of course, you likely already know that. They’ve been impossible to avoid. I receive them almost daily. Most recently, I received a call advising me that “substantial business tax incentives are still available through the employee retention tax credit program.” The caller offered to do the work for “a very reasonable back-end fee” and encouraged me to “Call my personal line now.”
Notably, IRS-CI work is in addition to ERC audits that have started. The agency says it has already referred thousands of ERC cases for audit.
ERC Relief
Here’s how the ERC works. Eligible employers are those that paid qualified wages to some or all employees after March 12, 2020, and before Jan. 1, 2022. Typically, to qualify, you must demonstrate that your business was shut down by a government order due to the pandemic during 2020 or the first three calendar quarters of 2021, or that you experienced a specific decline in gross receipts during the eligibility periods during 2020 or the first three calendar quarters of 2021. Some businesses may also qualify as recovery startup businesses for the third or fourth quarters of 2021 (otherwise, the ERC relief was phased out by Congress for businesses for that period).
The credit is 50% of up to $10,000 in wages, meaning that it can be as high as $5,000 per employee in 2020 and as high as $21,000 per employee in 2021 (totaling the $26,000 per employee that is regularly touted).
The ERC is available to most kinds of businesses, including tax-exempt businesses. It is not available to individuals, including freelancers and independent contractors.
Some additional restrictions apply. For example, businesses may not include wages funded by a Payroll Protection Program (PPP) forgivable loan (another Covid relief program) when calculating wages eligible for the ERC.
The IRS has created a chart to help a business or other organization quickly decide if they qualify for the ERC. While the IRS acknowledges that this is a very technical area of the law, they note that the chart includes the main eligibility factors. Taxpayers are encouraged to review IRS guidance and tools for helping determine ERC eligibility, including frequently asked questions and a new question-and-answer guide to help businesses understand if they are eligible for the credit.
More information is available on IRS.gov/erc.
Existing Deadlines
The original idea of the credit was to get money into the hands of employers experiencing a decline as it was happening. That meant that businesses could claim the credit at the time they were submitting payroll tax returns. But those eligible employers who missed out initially can still claim the ERC on an amended payroll tax return for a period within those dates.
The normal statutes of limitations apply, so businesses generally have until April 15, 2024, to file amended returns for 2020, and until April 15, 2025, to file amended returns for all 2021 quarters.
Call For Congressional Action
Laurel Blatchford from the Treasury Department says that Congress also has a role to play. She explained that Treasury would like to work with Congress to ensure that scammers and ERC promoters do not take advantage of taxpayers. She called on Congress to again address the issue of giving the IRS the oversight to regulate preparers—that issue was raised in the 2024 Green Book.
Treasury and the IRS attempted to regulate the practice of all paid tax return preparers, including individuals who are unlicensed and unenrolled, years ago. Paid tax return preparers challenged these regulations in Loving v. Commissioner, and the IRS lost. Previous proposals have failed to pass Congress.
Blatchford said that Treasury would send a letter to Congress asking them to take up the regulation issue and consider legislation prohibiting contingency fee arrangements for ERC claims. Many of those fee arrangements take as much as 25% of the ERC payment received from the government. The IRS has suggested that these contingency fee arrangements provide incentives to boost claims improperly.
Warning Flags
The IRS has previously noted ways promoters can lure businesses into applying for the credit. Some of those include:
- Aggressive marketing on radio, television, and online—as well as phone calls and text messages.
- Direct mail. Some ERC mills send fake letters to taxpayers from non-existent groups like the “Department of Employee Retention Credit.” These letters can look like official IRS correspondence or an official government mailing with language urging immediate action.
- Leaving out key details. Third-party promoters of the ERC often don’t accurately explain eligibility requirements or how the credit is computed. They may make broad arguments suggesting that all employers are eligible without evaluating an employer’s circumstances.
- The promoters may not inform taxpayers that they need to reduce wage deductions claimed on their federal income tax return by the amount of the ERC. This is a key detail that is being left out of these discussions. Legitimate tax pros have repeatedly recounted awkward conversations about the need to amend returns when businesses were not expecting to do so. This is a particular concern in a business “divorce”—we’re already seeing this play out in real-time.
- PPP participation. Many promoters don’t tell employers that they can’t claim the ERC on wages reported as payroll costs for purposes of the PPP.
Reporting Abuse
The IRS encourages taxpayers and tax professionals to report abuse. To do so, mail or fax a completed Form 14242, Report Suspected Abusive Tax Promotions or Preparers, and any supporting materials to the IRS Lead Development Center in the Office of Promoter Investigations.
What’s Next
Expect more news as the IRS continues to try and weed out ERC fraud. In the meantime, Werfel says, “The moratorium will help protect taxpayers by adding a new safety net onto this program to focus on fraudulent claims and scammers taking advantage of honest taxpayers.”