After numerous attempts to caution taxpayers about the fraud surrounding the Employee Retention Credit (ERC), the IRS declared a moratorium on all new ERC claims until at least December 31, 2023. Any existing claims submitted prior to the moratorium will be continue to be processed, but no new applications will be processed until at least that date.
As the IRS attempts to process the current applications—and determine if they are fraudulent or not—there are likely to be significant delays. The IRS stated taxpayers should expect processing times of 90 days to 180 days, but it could be longer if the IRS believes the claim may need further review, audit, or documentation from taxpayers.
What is the ERC?
As the pandemic forced businesses and their employees into a lockdown—especially in early 2020—several programs were created to keep those businesses and their employees from financial ruin. One such program was the Employee Retention Credit, passed by Congress in March 2020 as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
For those businesses significantly impacted by COVID-19, the ERC is fully refundable against payroll taxes, meaning the government was willing to offer relief for those businesses who were losing money but still paying their workers. Businesses have until 2025 to retroactively claim the credit by filing an amended tax return.
To be eligible for the ERC, employers must have:
- Sustained a full or partial suspension of operations due to orders from an appropriate governmental authority limiting commerce, travel or group meetings due to COVID-19 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, or
- Qualified as a recovery startup business for the third or fourth quarters of 2021.
What does ERC fraud look like?
The Employee Retention Credit is a legitimate tax credit, but because the ERC rules and structure were adjusted from bill to bill, its changes have created an inconsistent understanding of eligibility. Many of these ERC providers have not dealt with the IRS in compliance or audit representation matters and do not seek nor understand the full details regarding the credit’s requirements. They may claim the IRS guidance is “incorrect” and try to push for aggressive positions without their clients’ understanding or consent.
Warning signs of fraud to look out for include:
- Unsolicited calls or advertisements mentioning an "easy application process."
- Lies about eligibility requirements.
- Any “guarantees” the firms say they can provide, as it is unlikely those consultants will still be in existence years in the future when the claim is audited.
- Statements that the promoter or company can determine ERC eligibility within minutes.
- Large upfront fees to claim the credit.
- Fees based on a percentage of the refund amount of Employee Retention Credit claimed.
- Claims from the promoter that the business receiving the solicitation qualifies before any discussion of the group's tax situation.
- Claims urging businesses to submit their application because there is “nothing to lose.” (Those who received the credit without qualification could have to repay not only the credit, but also substantial interest and penalties.)
We're here to help
In the same release declaring the moratorium, the IRS also announced they will be creating an initiative to help taxpayer-businesses “who found themselves victims of aggressive promoters.” Additionally, there will also be an option to withdraw an application that has not yet processed. Details of these programs are slated to be released in the fall.
In the meantime, we strongly encourage you to work only with a trusted specialty tax advisor on the ERC. If you need assistance in applying for the credit, look for established firms who have experience in dealing with other complicated tax laws, including R&D Tax Credits and Cost Segregation.
If you have any questions about the ERC or the fraud surrounding it, reach out to us today.