September 19, 2023
IRS announces moratorium on processing new claims for employee retention credit
On September 14, 2023, the IRS announced (IR-2023-169) in a news release (News Release) that it was immediately pausing processing of new claims for the employee retention credit (ERC) through at least the end of the year due to continuing concerns about improper claims.
The ERC is a refundable federal employment tax credit that was first enacted as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in 2020 and repeatedly modified and extended. The credit is available for qualified wages paid by eligible employers during the pandemic from March 13, 2020, through September 30, 2021. The credit is generally claimed by filing a refund claim for the relevant quarter. While many refund claims already have been paid, others are still pending. The IRS has noted its concerns about the legitimacy of many of the refund claims, putting aggressive promotion of the ERC at the top of its "Dirty Dozen" list of tax scams for 2023.
The IRS has received approximately 3.6 million ERC claims since the program started. According to the IRS, the total inventory of unprocessed Forms 941-X, on which the ERC is claimed, was approximately 637,000 as of September 6, 2023.
There is concern that "a substantial share of new claims from the aging program are ineligible and increasingly putting businesses at financial risk by being pressured and scammed by aggressive promoters and marketing." The News Release advises that improper ERC claims must be paid back, possibly with penalties and interest. The IRS further urges taxpayers to validate eligibility before filing a claim, particularly because "a promoter can collect a contingency fee of up to 25% of the ERC refund," which could lead taxpayers to be "in a much worse financial position if it has to pay back the credit than if the credit was never claimed in the first place."
The IRS said it was continuing to work on ERC claims that the agency received before the moratorium, but the standard processing goal will go from 90 days to 180 days. Many claims will face additional scrutiny, with the IRS saying it could request documentation to make sure claims are legitimate. Due to the volume of claims, individual claims will not be expedited.
Auditors are examining ERC claims posing the greatest risk while IRS Criminal Investigation "is actively working to identify fraud and promoters of fraudulent claims for potential referral for prosecution to the Justice Department." The IRS said it has referred thousands of ERC cases for audit and hundreds of criminal cases are in the works. As a result of these efforts, IRS Criminal Investigation has initiated 252 criminal investigations involving over $2.8 billion in potentially fraudulent ERC claims.
Implementation of new programs
To help employers that have been the "victims of aggressive promoters," the IRS is implementing a settlement program so that employers can withdraw pending claims and repay improper ERC refunds. The settlement program will allow employers to avoid penalties and future compliance action. More details on this program will be available this fall. The IRS said it is also deciding how to deal with employers that had a promoter contingency fee payment deducted from their ERC refund. In addition, the IRS is finalizing a program that will allow employers that filed a claim but have not yet received the refund to withdraw the claim if they believe it was submitted improperly, even if the claim is already under or awaiting audit. Withdrawing a fraudulent claim, however, will not exempt the filer from potential criminal investigation and prosecution, the IRS said.
The IRS listed recommendations for three categories of taxpayers, depending on where they are in the process: (1) those considering filing a claim, (2) those who have filed and are awaiting a refund, and (3) those who have already received refunds.
The IRS advises those considering filing a claim to carefully review the ERC guidance and talk to a trusted tax professional before filing. This advice was augmented with the release of a new question and answer guide, which provides a step-by-step eligibility analysis for employers. Notably, the last step of the analysis queries whether the claim is based on supply chain issues, cautioning taxpayers to review the guidance in this regard.
The IRS tells those that have filed a claim and are awaiting refunds that it will continue processing existing claims but at a slower pace, and subject to additional compliance scrutiny. For these claims, the IRS again advises reviewing program guidelines with a trusted tax professional and expresses concern for claims based on supply chain issues. These claims will be eligible for withdrawal by the taxpayer in accordance with an IRS settlement program to be introduced this fall.
The IRS advises those businesses that have already received refunds that they now believe to be in error that details on the IRS settlement program will be forthcoming this fall.
The IRS also issued an additional news release (IR-2023-170) warning employers to watch out for "aggressive marketing by nefarious actors," with a list of red flags that should make employers pause and instructions for reporting ERC marketing abuses to the IRS.
The IRS has been warning taxpayers for some time about incorrect ERC claims. This latest announcement demonstrates the extent of the problem and the degree of the IRS's concern.
The News Release did not advise taxpayers against filing for refunds. Potentially eligible taxpayers that have not yet filed ERC refund claims, however, may want to work with their tax advisor to understand the complex eligibility requirements. While the validity of these taxpayers' claims has not changed, the processing will be delayed both by the moratorium, and the increased processing time.
The IRS continues to focus in particular on ERC claims premised on supply chain arguments, which were also the subject of a recent IRS general legal advice memorandum.
Taxpayers concerned about whether they may have filed improper claims may want to consult with their tax advisor; if improper claims were filed, the coming programs will allow them to withdraw the claims if unpaid or to repay refunds. The statute of limitations for refund claims generally expires April 15, 2024, for 2020 refund claims and April 15, 2025, for 2021 refund claims. The statute of limitations for IRS enforcement generally is the same, except that it expires April 15, 2027, for claims filed for the third quarter of 2021 (see Tax Alert 2023-0887 for additional details).
Published by NTD’s Tax Technical Knowledge Services group; Andrea Ben-Yosef, legal editor