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FAQs About the IRS Moratorium on the Employee Retention Credit (ERC)

by
Jon Osborn
on
9/29/2023
FAQs About the IRS Moratorium on the Employee Retention Credit (ERC)

In a bid to protect honest small business owners from an ever-growing number of fraudulent Employee Retention Credit (ERC) claims and aggressive promoters, the Internal Revenue Service (IRS) has taken decisive action. Earlier this month, IRS Commissioner, Danny Werfel, announced an immediate moratorium on processing new claims for this vital pandemic-era relief program. This moratorium, effective immediately and set to continue until at least the end of the year, underscores the agency's commitment to ensuring the integrity of the ERC program.

The ERC program, designed to offer financial assistance to businesses that continued to pay their employees during the COVID-19 pandemic, has been instrumental in helping countless small to mid-sized businesses stay afloat. However, over time, the program attracted the attention of unscrupulous individuals looking to fraudulently capitalize on government funds. This exploitation not only threatens the financial well-being of real businesses but places an undue burden on American taxpayers.

This guide shares answers to frequently asked questions about the IRS's decision to halt new ERC claims and explores the implications for both existing and potential claimants.

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Credit: Andresr/Getty Images

1. What is the IRS moratorium regarding the Employee Retention Credit (ERC)?

The IRS announced an immediate moratorium on processing new claims for the Employee Retention Credit (ERC) until at least December 31, 2023. This decision comes in response to concerns about a surge in improper claims for this pandemic-era relief program. It is unknown how far after December 31 the suspension will extend.

2. Why did the IRS implement this moratorium?

The IRS initiated the moratorium due to escalating concerns within the tax agency, as well as reports from tax professionals and the media. It appears that a substantial portion of recent claims made under the ERC program are ineligible, and some businesses are being targeted and pressured by aggressive promoters and marketers.

3. What does the moratorium mean for existing ERC claims?

During the moratorium period, the IRS will continue to process previously filed ERC claims that were received before the moratorium was enacted. However, due to increased concerns about fraud, processing times for these claims will be extended. The standard processing goal of 90 days will now extend to 180 days, and potentially longer if further review or audit is required.

Taxpayers may also be asked for additional documentation to validate their claims. Due to this, it is a good idea for all small business owners to work with a qualified tax professional.

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Credit: kate_sept2004/Getty Images

4. How will the enhanced compliance review benefit businesses?

The enhanced compliance review of existing ERC claims aims to protect against fraud and safeguard businesses from potential penalties or interest payments resulting from erroneous claims. It is a critical step to ensure the integrity of the ERC program and to prevent misuse.

5. What was the original purpose of the Employee Retention Credit (ERC)?

The ERC, also sometimes referred to as the Employee Retention Tax Credit (ERTC), is a refundable tax credit designed to assist businesses that continued to pay employees during the COVID-19 pandemic, even when their operations were partially or fully suspended due to government orders or experienced a significant decline in gross receipts. It is intended to provide financial relief during a variety of challenging financial times, though it originated, as noted, during the pandemic era.

6. Why should businesses be cautious when claiming the ERC through promoters or marketers?

While promoters may advertise ERC claims as "risk-free," there are substantial risks associated with improperly claiming the credit. If a business incorrectly claims the ERC, they may be required to repay it, potentially with penalties and interest. This could place a business in a worse financial position than if they hadn't claimed the credit at all.

Promoters can also collect a contingency fee of up to 25% of the ERC refund, adding further financial burden to the business. Again, if you have any questions about your eligibility, consult with a reputable small business tax expert in your local area.

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Credit: d3sign/Getty Images

7. What steps can businesses take during the moratorium?

Businesses with pending ERC claims should anticipate extended processing times and increased compliance scrutiny. The IRS advises caution and, as we stated, encourages businesses to consult with a trusted tax professional who understands the ERC rules. Business owners should also review the ERC guidelines carefully to ensure eligibility before applying on their own or through a promoter.

8. Are there options for businesses that have filed improper ERC claims?

Businesses that have already filed a claim but now believe it was submitted improperly may have the option to withdraw the claim. The IRS is working on a settlement program for repayments, though an exact start date has not been announced. This program will allow businesses to repay ERC claims, avoiding penalties and future compliance actions.

9. What red flags should businesses watch out for regarding ERC claims?

Businesses should be cautious of aggressive marketing tactics and questionable ERC claims. The ERC has specific eligibility requirements, including operational suspensions due to COVID-19 orders, significant declines in gross receipts, or qualification as a recovery startup business during specific quarters. Claims that do not meet these criteria may be ineligible.

10. How is the IRS addressing fraudulent ERC claims and promoters?

The IRS is actively working to identify and address fraud in the ERC program. The federal tax authority has trained auditors examining high-risk ERC claims, and the IRS Criminal Investigation division is pursuing investigations and potential prosecutions related to fraudulent claims. To date, IRS-CI has uncovered suspected pandemic fraud exceeding $8 billion, with numerous investigations and convictions.

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Credit: Sturti/Getty Images

The IRS is committed to ensuring the ERC program serves its intended purpose and protects businesses from fraudulent claims and promoters seeking to exploit it. Businesses are encouraged to rely on trusted tax professionals and exercise caution when considering ERC claims.

Have you been impacted by the ERTC moratorium?

Feature Image Credit: Hispanolistic/Getty Images

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Jon Osborn

Jon Osborn

Steward Financial Services
38 reviews

California

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