Due to an increase in ERC tax credit scams and fraud and to protect honest business owners, the IRS won't process new employee retention credit (ERC) claims for the foreseeable future. The immediate moratorium on new ERC claims processing was announced Thursday by IRS Commissioner Danny Werfel in response to concerns raised by tax professionals, the media, and the agency about scams surrounding the pandemic-era tax credit.
"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," Commissioner Werfel said in a release. "The further we get from the pandemic, the further we see the good intentions of this important program abused,” Werfel added.
The employee retention credit program was designed to provide relief to businesses and tax-exempt organizations. Eligible businesses were shut down during the pandemic due to government orders, experienced a decline in gross receipts, or were recovering start-up businesses for the third and fourth quarters of 2021. The ERC could be up to $5,000 per employee (for 2020) and up to $21,000 per employee in 2021, so long as an eligible business paid qualifying wages.
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- The moratorium, effective until at least Dec. 31, 2023, means that the IRS won’t process new ERC claims.
- However, the agency will continue to process previously filed ERC claims, of which there are about 600,000, according to the IRS.
However, the IRS says that it will take longer to examine those filings. As a result, claim processing times will increase along with ERC audit efforts and criminal investigations. The agency's goal is to target promoters and businesses who are suspected of filing dubious claims.
ERC tax credit 2023 IRS moratorium due to scams
The IRS has stopped processing new employee retention tax credit claims as of Sept. 14. The moratorium on new ERC claims will remain in place until at least Dec. 31, 2023.
- Payouts on previously filed ERC claims will continue during the moratorium where appropriate, but taxpayers may be asked to provide additional documentation to verify the legitimacy of their claims.
- According to the IRS, the standard processing time for ERC claims will extend to 180 days or more if the claim requires further examination or audit. (The IRS says thousands of ERC claims have already been flagged for audit.)
Additionally, the agency reports that hundreds of criminal cases are already under investigation. Kiplinger highlighted a recent case where the U.S. Department of Justice arrested a New Jersey tax preparer for allegedly seeking more than $124 million from the IRS. The multimillions came from filings of over 1,000 false tax forms claiming the employee retention tax credit.
Commissioner Werfel emphasized the critical importance of these enhanced compliance reviews to combat fraud and shield businesses from potential penalties and interest. According to Werfel, this fraud harms all taxpayers, not just ERC applicants.
"We could no longer tolerate growing evidence of questionable claims pouring in,” Werfel stated, adding, “The continued aggressive marketing of these schemes harms well-meaning businesses and delays the payment of legitimate claims, making it harder to run the rest of the tax system."
ERC criminal investigations and IRS guidance
The IRS offers guidance and tools, including new frequently asked questions, to help businesses understand the ERC so they don’t fall prey to scam promoters or marketers who may pressure them to apply fraudulently. The agency will also develop a settlement program, expected this fall, to facilitate repayment of some improper ERC claims. For more information, visit the IRS's ERC website.
Note: If you think you need help claiming the credit, the IRS suggests that you consult with a trusted tax professional, (not a promoter) to see if you're eligible and to determine the best way to proceed.
In the meantime, the IRS is collaborating with the U.S. Department of Justice to address fraudulent activity and promoters who disregard the rules. According to the IRS, its own Criminal Investigation division has initiated investigations into over $2.8 billion in potentially fraudulent ERC claims.
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