IRS Halts Processing of New ERC Claims

Executive summary

On Sept. 14, 2023, the IRS announced a temporary stop on processing new employee retention credit (ERC) claims due to its concerns about fraud. The moratorium is expected to extend at least through the end of the 2023 calendar year. In addition, the Service indicated it is in the process of finalizing programs through which taxpayers can withdraw their unprocessed ERC claims and repay refunds they’ve received. The IRS will otherwise continue to process previously filed claims, albeit at a slower speed and with increased scrutiny.

Key takeaways

• The IRS has placed a moratorium on processing new ERC claims through at least the end of the 2023 calendar year.
• The IRS is currently working with the Justice Department “to address fraud in the ERC program as well as promoters who have been ignoring the rules and pushing businesses to apply.”
• Taxpayers who have submitted among the 600,000 unprocessed ERC claims will soon have an option to withdraw them. Another option will be available for taxpayers to repay refunds they have received to avoid penalties. However, taxpayers who have willfully submitted fraudulent claims can still be criminally investigated and prosecuted, even if such a claim is withdrawn.
• Taxpayers who have worked with a credit mill or otherwise claimed the credit on aggressive grounds should strongly consider reaching out to their tax advisor to discuss whether they should participate in the withdrawal and repayment programs that are under development. While the details are outstanding, they appear to be extremely taxpayer-friendly, particularly the option to repay without penalty.
• The IRS will otherwise continue to process previously filed claims, albeit at a significantly reduced speed and with increased scrutiny.

Despite numerous warnings from the IRS cautioning taxpayers against working with so called ERC credit mills (see our previous tax alert), these firms have continued to aggressively advertise their services and cold call prospective clients. In response, the IRS has resorted to the extraordinary measure of placing a temporary stop on processing new ERC claims due to its concerns about the fraudulent activity the credit mills have been engaged in. Commissioner Danny Werfel said in the news release, “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. … 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."

Previously submitted claims

The IRS has a backlog of over 600,000 claims that it will continue to process, but at a significantly slower speed. The processing goal will increase from 90 days to 180 days, to allow for stricter compliance reviews. The IRS will also be unveiling two new programs: One through which taxpayers who have submitted an unprocessed claim can withdraw it even if it’s under or awaiting audit. The second, an ERC settlement program, will allow employers to repay ERCs received “to avoid penalties and future compliance action.” However, taxpayers who have willfully submitted fraudulent claims can still be criminally investigated and prosecuted, even if such a claim is withdrawn. Case in point, the IRS announcement notes that the Service is currently working with the Justice Department “to address fraud in the ERC program as well as promoters who have been ignoring the rules and pushing businesses to apply.”

Further details on the above-mentioned settlement programs are expected to be available in the coming weeks.

Action steps

Taxpayers who have worked with a credit mill or otherwise claimed the credit on aggressive grounds should strongly consider reaching out to their tax advisor to discuss whether they should participate in the withdrawal and repayment programs that are under development. While the details are outstanding, they appear to be extremely taxpayer-friendly, particularly given the option to repay without penalty.

For more information on this topic, or to learn how a Baker Tilly specialist can help, contact our team.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.