On September 14, 2023, the IRS issued a news release (IR-2023-169) announcing an immediate moratorium—through at least December 31, 2023—on the processing of new Employee Retention Credit (ERC) claims. The moratorium follows “growing concerns inside the tax agency, from tax professionals as well as media reports that a substantial share of 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.”
This release follows a number of recent IRS communications warning taxpayers to be wary of ERC promoters advising them to “apply” for ERC refunds when they may not qualify. This FORsights™ article offers our professionals’ perspective on the news release.
What Is the Bottom Line?
- We welcome this step from the IRS. We believe it is a boost for tax professionals who follow the rules.
- We believe this will allow them time to focus on the current backlog of claims.
- We are encouraged the IRS is advancing plans to target ERC “scammers.”
- We are encouraged the IRS is working on plans to assist companies that have filed inappropriate claims based on the advice of ERC promoters.
- We agree with the IRS’ recommendation to work with a trusted tax professional to apply for any future ERC refunds or to assess the sustainability of filed and unaudited claims.
- We continue to have confidence in the process we have used, which is in line with the IRS guidance for supporting ERC claims.
What Does This Mean for Taxpayers?
Processing of ERC claims has been slow since the program’s beginning. The IRS noted that it has more than 600,000 claims currently in process and will continue processing those claims, although with increased scrutiny. The IRS news release advises it may take longer for taxpayers to receive their refunds—increasing to more than 180 days from the current goal of 90 to 180 days. As we have not seen many taxpayers receive their refunds within 90 days, this does not appear to be a significant change. The temporary stay may actually help taxpayers with claims currently filed and unpaid. When the IRS resumes reviewing new ERC refund claims in 2024, there will be more scrutiny and safeguards in place to filter out illegitimate claims, which should allow more time for the IRS to focus on legitimate ones.
In recent months, the IRS has increased its volume of comments over concerns about ERC promoters encouraging taxpayers to file ERC claims for which they may not be eligible.
The IRS’ ire appears to be focused on potential illegitimate claims promoted by unscrupulous actors. The IRS’ growing skepticism does not affect legitimate ERC claims, other than that the refund process may be delayed as all remaining claims undergo additional scrutiny. Overall, we believe this is a good development for taxpayers with valid claims as it removes the tax cost and burdens related to processing invalid claims.
What Does This Mean for Taxpayers Who Have Filed a Claim?
The ERC program has been and continues to be a valuable program to help employers that were affected by the pandemic, pursuant to the qualifying criteria of the program. Whether a taxpayer has already received their refund or still awaits their refund, the sustainability of the claim will be wholly dependent on whether the taxpayer qualifies under the provisions of the ERC program. Given the limited guidance promulgated by the IRS, there are areas subject to interpretation which may become areas of negotiation with the IRS upon examination. However, the IRS’ growing concern appears to center on the increasing volume of claims now being filed (three years after the program was originally put in place), the questionable claims it is now reviewing, and the “continued aggressive marketing” of ERC schemes. Their concern does not appear to be with claims filed by eligible employers, but with claims that are clearly in violation of the statute and guidance.
IRS Commissioner Danny Werfel stated: “For those people being pressured by promoters to apply for the ERC, I urge them to immediately pause and review their situation while we look to add new protections and safeguards to stop bad claims from ever coming in.” For taxpayers that have been the “victims of aggressive promoters,” the IRS is developing new initiatives to help businesses settle or repay improperly received ERC refunds. That program is expected to be available this fall. In addition, the IRS is finalizing plans for a special program to allow taxpayers to withdraw impermissible claims, even if such claim is under audit or awaiting audit.
We recommend that any taxpayer with concerns about their claim (whether received or not) contact a trusted tax professional to help them review their claim and consider any remediation steps, if warranted.
What Does This Mean if You Are Considering Filing a Claim?
We agree with the commissioner who concisely stated: “Businesses should seek out a trusted tax professional who actually understands the complex ERC rules, not a promoter or marketer hustling to get a hefty contingency fee. Businesses that receive ERC payments improperly face the daunting prospect of paying those back, so we urge the utmost caution.”
In addition to the original statute, the IRS has produced and continues to provide guidance clarifying the rules. While there are still ambiguities and uncertainties, the limited guidance produces a minimum threshold all taxpayers must overcome to qualify for the ERC.
To qualify for the ERC, an employer must have:
- Sustained a full or partial suspension of operations due to orders from an appropriate governmental authority (not merely guidance, a recommendation, or a statement) limiting commerce, travel, or group meetings because of COVID-19 during 2020 or the first three quarters of 2021; or
- Experienced a significant decline in gross receipts during a quarter in 2020 or the first three quarters of 2021; or
- Qualified as a recovery startup business for the third or fourth quarters of 2021.
For taxpayers meeting the eligibility requirements, filing an ERC claim is a continued opportunity despite the IRS’ temporary pause on reviewing new claims.
What Are Key Dates to Consider?
ERC refunds are claimed by filing or amending Form 941, which is a quarterly payroll tax filing. The period available for either amending Forms 941 or for the IRS to adjust a filing is generally three years from the original due date. The general statute of limitations begins tolling on April 15 following the year to which the Form 941 applies. For example, the general statute of limitations on ERC claims for quarters in 2020 is April 15, 2024. The general statute of limitations on ERC claims for quarters in 2021 is April 15, 2025. For the third quarter of 2021, a special five-year statute of limitations applies instead of the general three-year statute (note, this provides the IRS additional time to audit but does not provide an employer additional time to file). In addition, if a refund has been issued, the IRS has the greater of (1) the rule above or (2) two years from the date the refund was issued (five years in the case of misrepresentation or fraud). Note that determining the exact statute of limitations is complex. In the case of material misstatements, the statute of limitations is generally extended. In the case of fraud, the statute may stay open indefinitely. The IRS also has suggested it may seek Congress to pass legislation for amended and extended statutes for ERC claims.
What Attributes Does the IRS List of Potential ERC Scammers?
On its website, the IRS has provided guidance to assist taxpayers in assessing if they are being scammed by ERC promoters. The IRS’ warning signs of aggressive ERC marketing include:
- Unsolicited calls or advertisements mentioning an “easy application process,” or offering a short eligibility checklist.
- Statements that the promoter or company can determine ERC eligibility within minutes.
- Large upfront fees to claim the credit.
- Fees based on a percentage of the refund amount of ERC claimed. This is a similar warning sign for average taxpayers, who should always avoid a tax preparer basing their fee on the size of the refund.
- Preparers refusing to sign the ERC return being filed by the business, exposing just the taxpayer claiming the credit to risk.
- Aggressive claims from the promoter that the business receiving the solicitation qualifies before any discussion of the group’s tax situation. In reality, the ERC is a complex credit that requires careful review before applying.
- The IRS also sees wildly aggressive suggestions from marketers urging businesses to submit the claim because there is nothing to lose. In reality, those improperly receiving the credit could have to repay the credit—along with substantial interest and penalties.
How Can FORVIS Help?
FORVIS has assisted clients with filing and defending ERC claims since the program’s inception. FORVIS has worked across multiple industries throughout the country and is familiar with many jurisdictions’ government orders. Professionals at FORVIS are very experienced as tax advisors helping our clients.
As tax preparers, we do not prepare any ERC engagements on a contingency fee basis. Further, we are a CPA firm subject to the quality and conduct standards of the American Institute of CPAs.
- If you believe you may be eligible to file an ERC claim, we can help you assess your qualifications and calculate the credit.
- If you are concerned about an ERC claim that you have already filed, whether or not you have received your refund, we can perform an ERC Mock Examination Assessment to help you better understand the viability of your claim and help you formulate a plan for remediation, if warranted.
- If you are assessing the realizability of financial statement revenue recognized related to ERC refunds or receivables, we can assist you in evaluating the associated U.S. GAAP or IFRS requirements.
- If you are under IRS exam, we have a team of tax controversy professionals to help guide you through the process. As the IRS unveils its new settlement programs, we can assist clients in navigating these new rules.
If you have any questions or need assistance, please reach out to a professional at FORVIS.