IRS Also Forecasts ERC Settlement Program
On September 14, 2023, IRS Commissioner Danny Werfel ordered an immediate moratorium on the processing of Employee Retention Tax Credit (“ERC”) claims. According to the IRS, the moratorium will be in place through at least December 31, 2023.
The moratorium is the IRS’s boldest step yet in its ongoing effort to stem the tide of what it maintains are illegitimate ERC claims being processed by aggressive promoters. For months the IRS has issued repeated warnings about so-called ERC schemes, placing abusive ERC schemes first on its 2023 “Dirty Dozen” list of abusive transactions. With over 3.6 million claims made to date and a backlog of over 600,000 claims, the IRS evidently determined that its prior steps were insufficient to address the magnitude of the problem. Commissioner Werfel acknowledged as much when announcing the moratorium, noting “[t]he 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.”
The IRS also is working on procedures by which ERC applicants with second thoughts about their unprocessed ERC claims may withdraw their claims, as well as on a settlement program through which ineligible recipients of ERC funds may repay those funds and avoid penalties.
“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,” cautioned Commissioner Werfel. “In the meantime, businesses should seek out a trusted tax professional who actually understands the complex ERC rules.”
The IRS’s announcement also notes that trained auditors are aggressively examining ERC claims posing the greatest risk, and that the IRS Criminal Investigation division is actively working to identify potential tax fraud and promoters of fraudulent claims for potential referral for prosecution to the Department of Justice.
The ERC, created under the CARES Act to assist businesses that continued to pay their employees during the COVID-19 pandemic, is a refundable tax credit that allows employers to offset their employment taxes against a percentage of qualified wages paid to employees. Eligible employers can claim the ERC on an original or amended employment tax return for an eligible period between March 13, 2020, and December 31, 2021. To qualify for the ERC, a business must meet one of the following three criteria:
- Experienced a full or partial suspension of operations resulting from a government order issued due to the COVID-19 pandemic during 2020 or the first three quarters of 2021;
- Experienced a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021 as defined by the criteria set forth in the appropriate IRS guidance (Notice 2021-20 for 2020 and Notice 2021-23 for 2021);
- Qualified as a recovery startup business for the third or fourth quarters of 2021 as defined in Notice 2021-49.
Since October 2022, the IRS has warned of dubious ERC schemes being aggressively promoted by firms that charge large contingency fees. Last March, the IRS issued IR-2023-49 placing abusive ERC schemes at the top of its 2023 list of “Dirty Dozen” transactions.
On March 8, 2023, the IRS advised that it was correcting the text of Treasury Decision 9953, temporary regulations allowing the IRS to recapture ERC erroneously allocated to employers by assessing and collecting the erroneous payments as underpayments of tax. The IRS takes the position that the corrections are effective on March 9, 2023, but applicable on September 10, 2021.
The IRS has pledged to aggressively audit questionable ERC claims and to criminally investigate individuals who knowingly promote illegitimate ERC transactions.
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