IRS Halts Employee Retention Credit Amid Scam Concerns. In response to growing concerns about a surge in fraudulent claims for the Employee Retention Credit (ERC), the Internal Revenue Service (IRS) has taken immediate action. IRS Commissioner Danny Werfel has ordered a temporary halt, effective immediately and extending at least until the end of the year, on processing new claims for this pandemic-era relief program. This move aims to safeguard honest small business owners from falling victim to scams and unscrupulous promoters.
Background and Concerns
The decision to institute the moratorium stems from mounting apprehensions within the IRS, as well as feedback from tax professionals and media reports. These concerns revolve around a significant number of new claims under the aging ERC program being ineligible. Such claims put businesses at financial risk due to aggressive promotion and potential scams.
Ongoing Efforts and Compliance Reviews
While the IRS will continue processing previously filed ERC claims received before the moratorium, the agency has warned of longer processing times due to heightened fraud concerns. Recent shifts in IRS focus involve rigorous reviews of these claims for compliance, including intensified audit activities and criminal investigations targeting promoters and businesses submitting questionable claims. Hundreds of criminal cases are already under investigation, with thousands of ERC claims referred for audit.
Payouts During Moratorium
The IRS underscores that payouts for legitimate claims will persist during the moratorium but at a slower pace due to comprehensive compliance reviews. These reviews mean that existing ERC claims, which typically have a 90-day processing goal, will now take up to 180 days, or potentially longer if subjected to further review or audit. Taxpayers may also be asked for additional documentation to verify the legitimacy of their claims.
Enhanced Compliance Measures
The enhanced compliance review of existing claims submitted before the moratorium serves a twofold purpose: to combat fraud and protect businesses from potential penalties or interest payments stemming from improper claims encouraged by promoters.
Message from IRS Commissioner Werfel
Werfel expressed deep concern over the harm inflicted on honest small business owners by unscrupulous actors. He urged individuals being pressured by promoters to apply for the ERC to pause and review their situations while the IRS implements new protections and safeguards to thwart fraudulent claims.
Guidance and Support for Taxpayers
Taxpayers are encouraged to consult IRS guidance and tools to determine ERC eligibility, including frequently asked questions and a new question and answer guide released to assist businesses in understanding their eligibility.
The IRS is developing new initiatives to assist businesses that have fallen victim to aggressive promoters. This includes a repayment settlement program for those who received improper ERC payments, with more details to be available in the coming months.
Additionally, the IRS is finalizing details for a special withdrawal option for taxpayers who have filed an ERC claim that has not been processed. This option aims to help businesses avoid repayment issues and promoter contingency fees. However, individuals who have willfully filed fraudulent claims will not be exempt from potential criminal investigation and prosecution.
Collaboration with the Justice Department
The IRS is collaborating with the Justice Department to address fraud in the ERC program and target promoters who flout the rules and encourage businesses to apply improperly.
IRS Criminal Investigation Efforts
The IRS Criminal Investigation division is actively working to identify fraud and promoters of fraudulent claims for potential prosecution. The division has initiated numerous investigations, resulting in federal charges and convictions in several cases.
Complexity of ERC Claims
The ERC is a complex tax credit designed to aid businesses affected by the pandemic. However, as the program has aged and the pandemic has receded, the IRS has noted that good intentions have been abused. Aggressive marketing of ERC schemes has harmed well-meaning businesses and delayed legitimate claim payments, affecting the overall tax system.
Risks of Improper Claims
Promoters may advertise ERC submissions as “risk-free,” but there are significant risks for businesses as the IRS intensifies audit and criminal investigation efforts. Improper claims may lead to repayment, penalties, and interest payments, potentially putting businesses in a worse financial position than if they had not claimed the credit.
Recommended Actions for Businesses
Depending on their circumstances, businesses are advised to:
- Awaiting ERC Claim Processing: Expect delays in processing existing claims during the moratorium period and anticipate extended wait times due to compliance scrutiny.
- Considering ERC Claim: Carefully review ERC guidelines during the moratorium and consult a trusted tax professional for guidance. Avoid promoters who collect large contingency fees.
- Withdraw Existing Claim: For those with pending ERC claims, review program guidelines with a tax professional and check the new question and answer guide. Withdraw claims if they were improperly submitted.
- Wait for ERC Settlement Program: Await details on the settlement program for repaying improper ERC claims, set to be available in the fall.
- Remaining Vigilant: Be cautious of promoters and thoroughly verify eligibility before applying for the ERC, as claiming the credit improperly can result in financial consequences.
As the IRS adapts to the evolving landscape of the ERC program, it seeks to strike a balance between providing relief to deserving businesses and protecting against fraudulent claims. The agency’s ongoing efforts aim to maintain the integrity of the ERC program while ensuring that honest businesses receive the support they need.
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