IRS Stops Processing of New ERC Refund Claims
Because of Recent Flood of Suspicious ERC Applications
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.
The Internal Revenue Service is putting an immediate stop to the processing of new claims for the Employee Retention Credit after receiving a surge of questionable claims. This will be in effect until the end of the year. 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 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. According to the IRS hundreds of criminal cases are now being worked on by its agents, and thousands of ERC claims have been referred for audit. Approximately 15% of all ERC claims received since the start of the program three and a half years ago were received in a recent 90-day period this year. 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 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.
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 of July 31, the IRS Criminal Investigation division has initiated 252 investigations involving over $2.8 billion of potentially fraudulent ERC claims. The IRS is encouraging businesses to seek out a trusted tax professional who actually understands the complex ERC rules, not a promoter or a marketer.
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 by the IRS yet. This will allow these businesses to avoid possible repayment issues and they won’t need to pay promoter’s 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. More details on the settlement program will be available later this fall.
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