DOJ to pursue fraud from aggressive marketing while IRS will add safeguards to prevent future abuse and protect businesses from predatory tactics
On Sept. 14, the Internal Revenue Service announced an immediate moratorium through at least the end of the year on processing new Employee Retention Credit claims, following reports of a flood of improper claims for the pandemic-era relief program.
According to their website, IRS Commissioner Danny Werfel ordered the immediate moratorium, which will run through at least Dec. 31, following growing concerns inside the agency, tax professionals and media reports that a substantial share of new claims are ineligible and increasingly putting businesses at financial risk by being pressured and scammed by aggressive promoters and marketing.
The IRS continues to work on previously filed Employee Retention Credit (ERC) claims received prior to the moratorium but renewed a reminder that increased fraud concerns mean processing times will be longer.
On July 26, the agency announced a shift in focus to review these claims for compliance concerns, including intensifying audit work and criminal investigations on promoters and businesses filing fraudulent claims. The IRS also announced that hundreds of criminal cases are being worked on, and thousands of ERC claims have been referred for audit.
The IRS emphasized payouts for previously filed ERC claims will continue during the moratorium period but at a slower pace due to a more detailed compliance review. 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.
"The IRS is increasingly alarmed about honest small business owners being scammed by unscrupulous actors, and we could no longer tolerate growing evidence of questionable claims pouring in," Werfel said. "The further we get from the pandemic, the further we see the good intentions of this important program abused. The continued aggressive marketing of these schemes is harming well-meaning businesses and delaying the payment of legitimate claims, which makes it harder to run the rest of the tax system. This harms all taxpayers, not just ERC applicants.
"For those people being pressured by promoters to apply for the Employee Retention Credit, 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," Werfel said. "In the meantime, 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 who receive ERC payments improperly face the daunting prospect of paying those back, so we urge the utmost caution. The moratorium will help protect taxpayers by adding a new safety net onto this program to focus on fraudulent claims and scammers taking advantage of honest taxpayers."
He encouraged taxpayers 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.
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.
In addition, the IRS is finalizing details that will be available soon for a special withdrawal option for those who have filed an ERC claim, but the claim has not been processed. This option, which can be used by taxpayers whose claim has not yet been paid, will allow taxpayers to avoid possible repayment issues and paying promoters contingency fees. Filers of the more than 600,000 claims that await processing can take advantage of this option. Those who 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.
As part of the wider compliance effort, the IRS is working with the Justice Department to address fraud in the ERC program as well as promoters who ignored the rules and pushed businesses to apply.
Trained IRS auditors are examining ERC claims that pose the greatest risk, and the IRS Criminal Investigation division is actively working to identify fraud and promoters of fraudulent claims for potential referral for prosecution to DOJ.
IRS Criminal Investigation (IRS-CI) investigates a variety of COVID fraud allegations ranging from fraudulently obtained employee refund tax credits to falsified Paycheck Protection Program loans. They have already referred thousands of ERC cases for audit.
ERC: Taxpayer risk grows amid aggressive marketing and potential to repay improper claims
When properly claimed, the ERC is a refundable tax credit designed for businesses that paid employees during the COVID-19 pandemic while their business operations were fully or partially suspended due to a government order or they had a significant decline in gross receipts during the eligibility periods. The credit is not available to individuals.
The ERC is a complex claim with precise requirements to help businesses during the pandemic, and the IRS has received approximately 3.6 million of these claims over the course of the program.
"As we move nearly two years beyond the 2021 eligibility date for the program and beyond the end of the pandemic, the reality that we're seeing and hearing from tax professionals and others is that many of the affected businesses have already come in," Werfel said. "This means we must increase our safeguards to protect against fraud and revenue loss."
Although promoters advertise that ERC submissions are "risk-free," there are significant risks facing businesses as the IRS increases its audit and criminal investigation work.
The IRS reminds anyone who improperly claims the ERC that they must pay it back, possibly with penalties and interest. A business or tax-exempt group could find itself in a much worse financial position if it must pay back the credit than if the credit was never claimed.
This underscores the importance of taxpayers taking precautionary steps to independently verify their eligibility to receive the credit before applying through a promoter. Taxpayers should take particular precautions because a promoter can collect a contingency fee of up to 25 percent of the ERC refund.
Advice for taxpayers: What to do as IRS works to help businesses facing questionable ERC claims
As the IRS works on additional ERC details, there are several steps the agency recommends for businesses, depending on where they are in the process:
For those who currently have an ERC claim on file, the IRS will continue to process these claims during the moratorium period, but at a greatly reduced speed due to the complex nature of these filings and the need to protect businesses from being improperly paid. Normal processing times could easily stretch to 180 days or longer.
Furthermore, many applications will face additional scrutiny, which means the payments could take even longer to be processed. While the IRS works on compliance measures during this period, the agency cautions businesses to expect extended wait times due to the large volume of claims and the complexity of the applications.
The IRS believes many of the applications currently filed are likely ineligible, and tax professionals note they are seeing instances where 95 percent or more of claims coming in recent months are ineligible as promoters aggressively push people to apply regardless of the rules.
For taxpayers with a pending application, the IRS urges them to review the three options below to see if any of those options may help with their current situation.
- For those who have yet to file a claim, review the guidelines and wait to file. The IRS urges businesses to carefully review the ERC guidelines during the processing moratorium period and to speak with a trusted tax professional – not a tax promoter or marketing firm. The new question-and-answer guide can also help.
- For businesses that have already filed, withdraw your existing claim. For those with a pending claim, the agency advises them to carefully review the program guidelines with a trusted tax professional and check the new question-and-answer guide. Under any scenario, if a business claimed the ERC earlier and the claim has not been processed or paid by the IRS, they can withdraw the claim if they now believe it was submitted improperly – even if their case is already under audit or awaiting audit. More details will be available shortly.
- Wait for the IRS ERC settlement program to be finalized. If your business has received an ERC that you now believe is in error, the IRS will provide additional details on the settlement program in the fall to allow businesses to repay ERC claims. The settlement program will allow businesses to avoid penalties and future compliance action. The IRS is assessing options on how to deal with businesses that had a promoter contingency fee paid out of their ERC payment.
ERC warning flags
The IRS has a list of red flags for aggressive marketing and questionable ERC claims.
The ERC is an incredibly complex credit, and there are very specific eligibility requirements for claiming the ERC. Employers can claim the ERC on an original or amended employment tax return for qualified wages paid between March 13, 2020, and Dec. 31, 2021. However, to be eligible, employers must have:
- Sustained a full or partial suspension of operations due to orders from an appropriate governmental authority limiting commerce, travel or group meetings because of COVID-19 during 2020 or the first three quarters of 2021;
- Experienced a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021; or
- Qualified as a recovery startup business for the third or fourth quarters of 2021.
Contact Zinner & Co.
If you have any questions, please contact one of our Zinnner & Co. recovery specialists to learn more about the ERC and if your business qualifies.
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