On March 7, 2023, the IRS issued IR-2023-40, its third warning in six months related to fraud and abuse in the Employee Retention Credit (“ERC”) program. 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 taxpayers 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.
In IR-2023-40, the IRS warned of third-party promoters that are soliciting employers who may not be eligible to file claims for the ERC and are aggressively promoting the credit through online and radio ads. Promoters often charge large upfront fees or a fee contingent on the amount of the ERC refund that a taxpayer receives and may neglect to inform taxpayers that wage deductions claimed on a business’s federal income tax return must be reduced by the amount of the credit the business receives. By improperly claiming the ERC, taxpayers may be required to repay the credit along with penalties and interest.
IR-2023-40 follows earlier warnings that the IRS issued in October 2022 and November 2022 regarding improper ERC claims. Underscoring the IRS’s focus on this enforcement area, Acting IRS Commissioner Douglas O’Donnell stated that, “[t]he IRS is actively auditing and conducting criminal investigations related to these false claims.” The IRS is also concerned about the increasing role of tax professionals in claiming improper credits for their clients. To that end, IR-2023-40 notes that the IRS Office of Professional Responsibility is working on additional guidance for the tax professional community that it will release in the near future.
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