IRS Enacts Moratorium on Processing ERC Claims Amid Fraud Concerns. In response to a surge in questionable claims for the Employee Retention Tax Credit (ERC), the IRS has taken immediate action, suspending the processing of new credit claims until at least the conclusion of 2023. This drastic measure has been implemented to safeguard honest small business owners from falling victim to unscrupulous individuals who are submitting dubious claims on their behalf.
Addressing the Fraud Issue
The Nature of the Fraud Problem
The ERC is a refundable tax credit designed to assist businesses that either continued paying employees during pandemic-related shutdowns in 2020 and 2021 or experienced significant declines in gross receipts from March 13, 2020, to December 31, 2021. Eligible employers can receive substantial credits, potentially up to $26,000 per retained employee, and it can still be claimed through amended returns.
However, the eligibility criteria are stringent, requiring businesses to have:
- Suffered a full or partial suspension of operations due to government orders related to COVID-19 in 2020 or the first three quarters of 2021.
- Experienced a significant decline in gross receipts in 2020 or the first three quarters of 2021.
- Qualified as a recovery startup business, which can claim up to $50,000 per quarter without demonstrating suspended operations or reduced receipts for the third or fourth quarters of 2021.
Additional Restrictions Apply to This Credit
Despite these criteria, the allure of substantial ERC value, combined with the extended filing deadline of April 15, 2025, has given rise to a cottage industry of fraudulent promoters offering assistance to businesses seeking these refunds. These promoters often exploit inaccurate information to attract unsuspecting clients, who may pay hefty upfront fees or a percentage of their refunds.
The Consequences of Fraudulent Claims
Victims of these schemes may find themselves responsible for repaying the ERC along with penalties and interest, in addition to fees paid to the promoters. Moreover, as highlighted by the IRS, these promoters may omit crucial details, potentially triggering a cascade of tax-related issues for unaware businesses.
Impact of the Moratorium
While legitimate claims that have already been filed will still be processed during the moratorium, taxpayers should prepare for longer processing times. The IRS has extended the standard processing timeframe from 90 to 180 days and potentially even longer for claims subject to further review or audit.
Amid mounting concerns about fraud, the IRS is shifting its focus towards compliance-related issues. This shift involves intensified audits and criminal investigations targeting both promoters and businesses associated with suspicious claims.
Additionally, the IRS is actively developing new initiatives to assist businesses that have fallen victim to deceptive promoters. One forthcoming initiative is a settlement program that will enable recipients of improper ERC payments to avoid penalties and future compliance actions by repaying the erroneously received amount.
If you have already claimed the ERC but believe your claim was improper and it has not yet been processed or paid, you have the option to withdraw your claim, even if it is already under or awaiting audit. The IRS emphasizes that this option is available to the more than 600,000 claims currently awaiting processing.
The IRS has issued a stern warning to those suspected of willfully submitting fraudulent ERC claims (including claims that are later withdrawn) or conspiring with others to do so. Such individuals may face potential criminal investigations or prosecution. Anyone concerned about these legal ramifications should seek guidance from a qualified attorney to ensure the confidentiality of their communications.
Still Contemplating an ERC Claim?
Despite the moratorium, the IRS encourages taxpayers to thoroughly review ERC guidelines. Legitimate claimants should not be discouraged. However, it is crucial to verify the validity of your claim with a “trusted tax professional,” rather than relying on tax promoters or marketing firms seeking to profit at your expense. Additionally, anticipate delays in the payment of your credit and consider reaching out to your trusted tax advisor at ORBA if you have ERC-related questions.
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