The IRS recently issued a press release regarding its “continuous efforts to combat dubious Employee Retention Credit (ERC) claims” to announce an initial round of over 20,000 notification letters of disallowed ERC claims. This initial round of notices is addressing two “problem areas” the Service has identified in their ongoing review of ERC claims: 1) the employer entity was not in existence during the period of eligibility; 2) there were no paid employees during the period of eligibility. The IRS is making patently clear that ERC claims are under maximum scrutiny and remain a high priority in 2024 for the Service.
This comes on the heels of a moratorium the IRS instituted because of the widespread concerns regarding the mounting hype and marketing of ERC claims and large amounts of fraud claimed by the IRS. Since that moratorium, the IRS has also incentivized retraction of undecided claims with a special withdrawal process, and a soon-to-be-launched voluntary disclosure program.
The ERC is a refundable tax credit enacted by Congress in 2020 as part of the CARES Act that was meant to provide pandemic relief. There are specific elements for an employer to be eligible, which include full or partial suspension of their business operations to comply with mandated shutdowns or restrictions during 2020 or the first three quarters of 2021, as well as experiencing a significant decline in gross receipts for the same timeframe. Improper ERC claims and promoters promising credits without a good faith basis to expect eligibility quickly mounted and forced the IRS to publish warnings throughout 2022 and 2023.
Previously in March 2023, the IRS Office of Professional Responsibility issued a memorandum on the ERC and again emphasized the purpose and eligibility for ERC, reminding practitioners of Circular 230 professional responsibilities and required standards in reporting. It was also highlighted within this memo that the IRS Criminal Investigations Division and the US Department of Justice initiated criminal investigations and had already indicted some promoters or other individuals that facilitated “excessive ERC claims.”
In light of the criminal consequences that are now apparent, the IRS’s Dec. 6th press release should only further caution taxpayers and preparers alike against submitting any frivolous or “excessive” ERC claim. Not only might it be summarily dismissed en masse in a similar second, third, or fourth 20,000 batch of notices, it has the proven potential to open up the taxpayer and/or promoter to criminal investigation or indictment.
The withdrawal request window lasts until at least the end of 2023 and allows certain employers that filed an ERC claim but haven’t gotten any refund yet to withdraw the submission without fear of penalties or interest. Details on the voluntary disclosure program are expected in late December. Stay tuned with the Dollars and Sense team for all the latest ERC news.
Many taxpayers claimed the ERC because of a real need and the moratorium impacts not only illegitimate claims but also legitimate claims as well. For taxpayers who are confident in the claims they made there might be an option to file a refund action, if certain facts apply, to expedite the ERC relief requested despite the IRS moratorium. However, this action would need to be carefully considered.
Link to Dec. 6, 2023 press release here.
Link to full Office of Professional Responsibility memo here.