BY Catherine Lightfoot, CPA, CHBC, Director of Healthcare at EEPB
On September 14th, the IRS announced a pause on its review of new Employer Retention Credit (ERC) claims through December 31, 2023. They cited this action to “protect taxpayers from scams” due to a “surge of questionable claims.” How does the new announcement affect you? Many have already reaped the benefits of the ERC program. Others have outstanding claims and are waiting for a refund. And those still considering whether they are eligible for the claim are left in the lurch until 2024, when there will be a significant backlog.
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A brief history
First, let’s back up and briefly review why we had the ERC and who could benefit. The federal government established the ERC to provide a refundable employment tax credit to reduce the cost of keeping employees on the payroll during the COVID-19 pandemic. The credit generally applied to employers with 500 or fewer full-time employees in 2021 or less than 100 full-time employees in 2020, who either were subject to a full or partial government shutdown or experienced a reduction in gross receipts compared to 2019 on a quarter-to-quarter comparison. For March 13 – December 31, 2020, the reduction had to be fifty percent in at least one quarter to start qualification, then twenty percent to continue it. For January 1 – September 30, 2021, the reduction had to be twenty percent or more of 2019 amounts compared to each corresponding quarter. Special rules also support the recovery of startups, severely distressed businesses, and businesses affected by supply chain disruptions. Each of these special rules has specific qualifications.
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Why pause now?
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According to the IRS, this pause is intended to disrupt “an ecosystem” of providers filing thousands of claims for the ERC benefit with improper qualifications. This refers to the countless fictitious firms that sprung up just to cash in on ERC—maybe you saw them on a commercial—lacking any concern for filing with due diligence and care. In addition to open fraud, providers are filing claims where the fact patterns simply do not meet the requirements of the ERC program. Thus, the IRS has been inundated with millions of ERC applications and is trying to weed out the bad actors. This break will give them time to identify the fraudulent claims the fraudulent claim promoters and (per news reports) begin to conduct criminal investigations into the unethical practices.
What it is, and what it isn’t
Essentially, the IRS is delaying its processing of “new claims,” i.e., those filed between September 14, 2023, and the beginning of 2024. This does not stop claims already in progress and filed, but it likely will result in a longer time to process those claims. Rest assured, this is not a complete cessation of the ERC program. The first deadline for 2020 claims will be on April 15, 2024. Clients with valid claims should still prepare to file claims even though processing will be delayed. It is still essential to have a valid claim filed before the ERC program expires.
How to spot a problem
The IRS has suggested some key warning signs of aggressive ERC marketing techniques used to lure people into a potential scam:
- Unsolicited phone calls mentioning an “easy application process.” There is no easy process. Any amended return filed by a business should be backed up with documentation to support the adjustment.
- Quick calculations of the credit amount. I have seen some clients receive their amended payroll returns the same day they turn in the questionnaire.
- Undocumented qualification without any discussion of the business’ tax situation. Often the promoter has payroll data and multiplies the number of employees by the eligible credit for all possible quarters. This easy math should be a red flag that the qualifications are not being documented.
- Mistaken supply chain arguments. IRS legal guidance in July made it very clear that supply chain disruptions qualify for the credit only if they were due to a government order. The IRS has also provided guidance on the disruption this caused and that the disruption only lasts as long as the order does.
How to proceed
Suppose you filed a claim with a company that only sent you a questionnaire, and the only documentation requested was payroll reports. In that case, you should work to document your file with appropriate support. There is a five-year statute of limitations on ERC claims from the third quarter of 2021, and the other ERC periods all have a three-year statute. Documentation will only get more complicated to recover as time slips by. Therefore, do not wait for an IRS audit or inquiry to gather your documentation.
Conclusion
I cannot stress enough that those with valid ERC claims should file even though the refund of credits may be delayed. It is always a good idea to consult with your trusted tax professional to support your claim for the credit. They will give you an honest explanation of the credit itself and provide a detailed worksheet of the computations used to determine your credit amount. Don’t settle for anything less!