The Internal Revenue Service said Thursday it’s putting an immediate stop to processing of new claims for the Employee Retention Credit after receiving a surge of questionable claims.
The immediate moratorium will be in effect until the end of the year. It comes as tax professionals have been inundated by requests by clients for help with claiming the ERC or dealing with the impact of the IRS disallowing claims and conducting audits after businesses responded to the heavily advertised promotion on TV, the internet and social media (see story).
The IRS believes a substantial portion of the 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 Employee Retention Credit program was initiated in 2020 in response to the COVID-19 pandemic as a way of encouraging employers to keep employees on their payrolls despite widespread shutdowns across the country, but it only applies to business interruptions through the third quarter of 2021. This year, thanks to aggressive promotions by so-called ERC mills, the IRS is receiving more claims for the credit this year than ever before.
The IRS said it will continue to work on previously filed ERC claims that it received before the moratorium but issued a reminder that the increased fraud concerns will mean processing times will take longer. In July, the IRS announced it was shifting more of its focus to review ERC claims for compliance concerns, including intensifying audit work and criminal investigations on promoters and businesses filing dubious claims. The IRS said Thursday that hundreds of criminal cases are now being worked on by its agents, and thousands of ERC claims have been referred for audit.
The IRS stressed that payouts for these claims will continue during the moratorium period but at a slower pace due to the detailed compliance reviews. With the stricter compliance reviews in place during this period, existing ERC claims will go from a standard processing goal of 90 days to 180 days, and much longer if the claim faces further review or audit. The IRS may also ask for extra documentation from the taxpayer to ensure it is a legitimate claim.
“The Employee Retention Credit has been a growing concern at the IRS for several months,” said IRS Commissioner Daniel Werfel during a conference call Thursday with reporters. “The Employee Retention Credit was passed by Congress in the depths of the pandemic. It was a lifeline to protect millions of jobs and provide economic support for businesses. Time has passed and now, more than two years removed from the heart of pandemic economic disruption, we are deeply concerned that this program is not operating in a way it was intended. Today, far from the height of the pandemic in 2020 and 2021, we believe we should see only a trickle of employee retention claims coming in. Instead, we are seeing a tsunami.”
He blamed the onslaught of bogus claims on the aggressive promoters targeting small businesses. “The ads are everywhere,” said Werfel. “The program has become a centerpiece for unscrupulous marketing that profits from pushing taxpayers to claim credits that they may not be eligible for. At the IRS and across the nation’s tax professional community, we all hear too many honest small businesses are being put at financial risk for the benefit of these aggressive promoters. We must do more to protect innocent small businesses from being victimized. We cannot let that continue.”
He said the IRS would be adding new protections to the program. “We want this program to work as it was designed, helping businesses that qualify under the stringent pandemic requirements,” said Werfel. “It was not designed to be a gravy train for promoters flooding the IRS with ineligible applications that slows down work on ERC and other important matters for taxpayers. This aggressive promotion by ERC mills is falsely raising hopes for many and slowing down legitimate claims from businesses. Our moratorium comes after we’ve heard increased concerns from the tax community and media reports, as well as from our own internal team, about the growing number of ineligible claims being sent into the IRS.”
So far, he noted, the IRS has received around 3.6 million ERC claims, and its current open inventory of open claims is over 600,000, nearly all of which were received within the last 90 days.
“That means about 15% of all ERC claims received since the start of the program three and a half years ago have been received in the last 90 days,” said Werfel. “That’s an incredibly large number to have so far beyond the pandemic and nearly two years after the time period covered by the program.”
The moratorium aims to protect taxpayers from the scams, and Werfel is encouraging small businesses to seek out qualified tax professionals to help them in case they’ve been victimized.
“We hope this moratorium will send a strong signal to anyone using these promoters that they are putting themselves at risk,” he said. “We want businesses to step back and talk to a trusted tax professional, not a promoter out looking to take a big chunk of a refund.”
He noted that the IRS would continue to work on previously filed ERC claims received prior to the moratorium, but he renewed a warning issued earlier this summer that the processing times for the claims will be longer amid the flood of bogus claims, and could take six months or more.
“With the stricter compliance review in place during this period, existing ERC claims will go from a standard processing goal of 90 days to 180 days and much longer if the claim faces further review or audit during this period,” said Werfel. “During this period, this enhanced compliance review of existing applications in the pipeline is critical to protect against fraud, but also to protect the businesses and organizations from facing penalties or interest payments stemming from bad claims pushed by promoters.”
He acknowledged that the additional time would delay payment of legitimate claims to businesses. “This harms all taxpayers, not just ERC applicants,” said Werfel.
As part of a wider compliance effort, the IRS is working with the Justice Department to focus on addressing fraud in the ERC program, as well as going after promoters who have been ignoring the rules and pushing businesses and organizations to apply for the credits whether or not they qualify.
“As the IRS increases efforts to review claims, our work to find questionable claims and pursue criminal investigation work is intensifying,” said Werfel.
As of July 31, the IRS Criminal Investigation division has initiated 252 investigations involving over $2.8 billion of potentially fraudulent ERC claims, he noted. Of those, 15 of the 252 investigations have resulted in federal charges to date. So far six have resulted in convictions, and four of the cases have reached the sentencing phase, with the average prison sentence being 21 months.
The IRS is also auditing the claims and has already referred thousands of ERC claims for further examination, he noted.
He urged businesses that are being pressured by aggressive promoters to first pause and review their situation while the IRS works to add new protections and safeguards to stop bogus claims from ever arriving.
“Businesses should seek out a trusted tax professional who actually understands the complex ERC rules, not a promoter or a marketer hustling to get a hefty fee,” said Werfel.
The IRS has released a new document with some quick answers about eligibility for the credit as well as red flags about signs to watch for with bogus claims.
“This is a complex area of the law, so we encourage businesses, regardless of what stage of an ERC claim they are at, to review this document,” said Werfel. “We believe some businesses that review this new document may realize that they may not actually be eligible for the ERC.
Instead, they’ve been misled by an aggressive promoter. We urge businesses to turn to a trusted tax professional, someone who really has the interest of the taxpayer in mind.”
For businesses caught in such a situation, the IRS is developing new initiatives to help businesses that may have fallen victim to aggressive promoters. There will be a new withdrawal option for businesses with a pending ERC claim if the business is concerned it may not have a legitimate claim.
If businesses were pushed into applying due to false claims by a promoter, they will have a chance to withdraw a pending claim from the IRS. The withdrawal option can be used by anyone in the group of 600,000 employers whose claim hasn’t been paid yet. This will allow these businesses to avoid possible repayment issues and they won’t need to pay promoters contingency fees from their own refunds. The IRS will provide more details on the withdrawal process in the near future.
The IRS is also building a special settlement program. “This option will allow repayments for those who received an improper ERC payment,” said Werfel.
More details on the settlement program will be available later this fall.
Accounting Today asked whether the settlement program might also apply to tax professionals who may have been misled into filing ERC claims because of the aggressive promotions or who wanted to help clients deal with questionable claims.
“We’re working closely with the tax professional community and have been for quite some time as this risk has emerged, and while we work through the details of the settlement program, we are certainly interested in input from the tax professional community on how they believe the settlement program should be set up to best balance the various issues at play,” Werfel responded.
One of the red flags the IRS has been noticing with many of the recent ERC claims has been about supply chain disruptions during the pandemic, and Accounting Today asked about that as well.
“Those that are claiming eligibility for the credit under supply chain disruption is one of the areas where we’re seeing a lot of ineligible claims come in because the evidence of their ability to justify supply chain disruption is not sufficient or nonexistent,” Werfel responded. “That is one of the areas by which we believe promoters are pushing honest small businesses and giving them false information about how that supply chain eligibility criteria works, and they’re overpromising how that provision works, and then we’re seeing these claims come in.”
The IRS noted that contrary to advice given by unscrupulous preparers, IRS legal guidance in July makes clear that supply chain disruptions do not qualify an employer for the credit unless they are due to a government order. “Employers that experienced supply chain disruptions qualify for ERC only if they had to suspend their business operations because their suppliers were unable to provide critical goods or materials due to a government order that caused the supplier to suspend its operations,” said the IRS.
Tax preparer regulation legislation
The Treasury Department is sending a letter to leaders in Congress urging them to give the IRS the authority to regulate paid tax preparers as a way to stop the aggressive ERC mills.
“Congress also has a role to play in addressing these challenges, and the Treasury Department would like to work with Congress on policy proposals that can protect small businesses and help ensure legitimate claims are processed accurately and efficiently,” said Laurel Blatchford, chief implementation officer for the Inflation Reduction Act at the Treasury Department, during the press conference. “The Biden administration’s 2024 Greenbook includes a proposal to provide the IRS authority to regulate paid preparers, which could help protect taxpayers from penalties, interest or other avoidable costs of litigation that result from poor quality advice that they receive from unscrupulous mills. While states have taken action to ensure paid preparers meet minimum standards, all Americans interact with the tax system, and federal legislation to ensure paid preparers meet minimum standards is critically important.”
She acknowledged that proposals to regulate paid preparers have previously been considered by Congress, but she pointed to the heightened urgency to address the issue now, given the level of unscrupulous marketing and scams the IRS is seeing directed at small business owners.
“Congress should pass legislation making clear these mills have to play by the same rules and other professionals who prepare returns for taxpayers,” said Blatchford. “These mills may claim they aren’t paid preparers, but they receive compensation for their advice, and legislation granting the IRS authority to regulate preparers would cover them as well.”
She noted there are other options Congress could explore such as prohibiting contingency fee arrangements for ERC claims, while the Treasury Department and the IRS could consider proposed regulations banning contingency fee arrangements for ERC claims.
“If granted additional authority by Congress to regulate paid preparers, a legislative prohibition would take effect far more quickly,” Blatchford added.
Deputy Treasury Secretary Wally Adeyemo is sending a letter to Congress Thursday urging partnership on potential legislative solutions, she pointed out.
Former IRS commissioners weigh in
Former IRS Commissioner Charles Rettig expressed support for the moratorium. “The ERC is an important program specifically designed to assist eligible small businesses,” he said in an email to Accounting Today. “Most eligible businesses submitted claims long ago. Unfortunately, a flood of more recent ERC claims have been received from those who are apparently not eligible for the refundable credit. The IRS news release refers to businesses being subjected to pressure from aggressive promoters. I’d anticipate strong support for this moratorium from the tax professional community.”
Rettig noted that many tax professionals have been working hard to control the anticipations of clients who have been persuaded by others that there is little to no risk associated with submitting an ERC claim.
“There is a financial risk of repayment of the refundable credit plus interest, potential penalties and possibly more,” he added. “Sometimes ‘too good to be true’ turns out to be ‘too good to be true, plus penalties.’ Whether an ERC claim has been submitted or not, businesses should carefully review the newly released IRS ERC Eligibility Checklist and consider consulting an experienced, competent, independent tax advisor. If the business is not eligible, withdraw the ERC claim, even if already under examination. If the ERC has been received, look for IRS to announce settlement program procedures for repayment, likely without penalties and future compliance actions. Congratulations to the IRS for taking this action and creating a viable path forward for businesses and tax professionals.”
His predecessor, former IRS Commissioner John Koskinen, believes the moratorium is not unexpected.
“Like many, I have been surprised by the number of commercials on television and radio that have suddenly appeared urging businesses to apply for the Employee Retention Credit,” he said in an email to Accounting Today. “Since the time period for the credit expired almost two years ago, it hasn’t been clear to me why employers would suddenly discover that they should have applied for the credit earlier and can catch up by filing now. Thus I’m not surprised that the IRS has taken the action it has to protect small businesses from what in many cases is just a scam and a way for the promotors to receive fees for their supposed insights and help.”
He sees signs of fraud in the aggressive promotions for the ERC.
“There may be a small number of businesses that, for some reason, missed all the publicity during 2020 and 2021 about the loans and credits available to small businesses who kept paying their employees during the pandemic,” said Koskinen. “But the large number of amended returns suddenly being filed in response to the push by aggressive promotors clearly is a signal that fraudsters are at work.”
Former IRS Commissioner Mark Everson, who is now a vice chairman at the tax consulting firm alliantgroup, said he supports the moratorium as well.
“At alliantgroup, we have helped thousands of taxpayers claim this important benefit,” he said in an email. “That said, we have also screened out thousands of potential claimants who don’t qualify for the Employee Retention Credit. In too many instances other so-called experts have then stepped in and assisted them in securing monies from the government under the flimsiest of justifications. This dynamic is damaging the tax community. “