The Employee Retention Credit (ERC) is a complex tax credit for businesses and tax-exempt organizations that kept paying employees during the COVID-19 pandemic when they were shut down due to a government order, had a significant decline in gross receipts, or qualified as a recovery start-up business. The eligibility requirements are different, depending on the periods in 2020 and 2021 for which the ERC is claimed.
The IRS continues to see aggressive marketing that lures ineligible taxpayers to claim the ERC. While the credit is real, many promoters are aggressively misrepresenting who can qualify for the credits. In many instances, the IRS is seeing businesses and organizations being misled by promoters into thinking they’re eligible when they are not.
As a reminder, anyone who improperly claims the ERC must pay it back, possibly with penalties and interest. Some taxpayers may even face criminal prosecution. Taxpayers are encouraged to review IRS guidance and tools for helping determine ERC eligibility, including frequently asked questions and a new question and answer guide to help businesses understand if they are actually eligible for the credit.
On September 14, 2023, the IRS announced an immediate moratorium on processing of new claims through at least December 31, 2023. This will allow the IRS time to add more safeguards to prevent future abuse and protect businesses from predatory tactics.
The IRS emphasizes that payouts for any claims filed before the moratorium began will continue, but the IRS will process the claims 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 seek additional documentation from the taxpayer to ensure it is a legitimate claim.
Resolving an Improper ERC claim
The IRS is developing new initiatives to help businesses who found themselves victims of aggressive promoters. This includes a settlement program for repayments for those who received an improper ERC payment; more details will be available this fall.
There are currently more than 600,000 ERC claims awaiting processing. If you improperly claimed the ERC on an amended return, you will be able to withdraw your amended return that included your ERC claim as long as your claim has not been processed and paid. Requesting a withdrawal means you would be asking the IRS not to process your entire amended return that included your ERC claim. This option – which can be used by taxpayers whose claim hasn’t yet been paid– will allow the taxpayers, many of them small businesses who were misled by promoters, to avoid possible repayment issues and paying promoters contingency fees. More details will be available shortly.
Those who have willfully filed fraudulent claims or conspired to do so should be aware, however, that withdrawing a fraudulent claim will not exempt them from potential criminal investigation and prosecution.
The IRS is also working on a settlement initiative for taxpayers who believe they shouldn’t have claimed the ERC and want to repay it. Check IRS.gov/erc and IRS Operations: Status of Mission-Critical Function (Filed a Return in 2022/Status of Processing Form 941) for updates.
Additional Resources
- Employee Retention Credit | Internal Revenue Service (irs.gov)
- Employee Retention Credit Eligibility Checklist: Help understanding this complex credit | Internal Revenue Service (irs.gov)
- Frequently asked questions (FAQs)
- To protect taxpayers from scams, IRS orders immediate stop to new Employee Retention Credit processing amid surge of questionable claims; concerns from tax pros | Internal Revenue Service
- Red flags for Employee Retention Credit claims; IRS reminds businesses to watch out for warning signs of aggressive promotion that can mislead people into making improper ERC claims | Internal Revenue Service
