"The road to hell is paved with good intentions ..."
- Samuel Johnson, 18th-century author and lexicographer.
Due to major concerns about ERC tax fraud, the IRS announced that it is immediately halting the review and processing of Employee Retention Credit (“ERC”) claims amid high numbers of questionable and potentially fraudulent claims. In public notice IR-2023-169 (Sept.14, 2023), the IRS stated that the moratorium on processing new ERC claims for the tax credit will run through at least December 31st of this year. In addition, the IRS will continue to work on previously filed claims, but the amount of time it will take to process claims will increase from 90 to 180 days due to an enhanced review process, and could take even longer if a claim faces further review or audit, according to IRS Commissioner Danny Werfel.
Lawmakers first enacted the ERC in the Coronavirus Aid, Relief and Economic Security Act in 2020 to help keep workers on the payroll while businesses dealt with pandemic closures. The Infrastructure Investment and Jobs Act, which President Joe Biden signed into law in 2021, moved up the planned end of the credit for wages paid from the end of 2021 to Sept. 30, 2021. In Notice IR-2023-170 (September 14, 2023), the IRS published “red flags” and “warning signs” of aggressive tax preparers and promoters, warning employers to be careful when third parties urge them to claim it. Some of these “red flags” include:
1. Aggressive marketing campaigns. This can be seen in countless places, including radio, television, social media, online as well as phone calls and text messages;
2. Direct mailing. Some “ERC mills” are sending out fake letters to taxpayers from the non-existent groups like the "Department of Employee Retention Credit." These letters can be made to look like official IRS correspondence or an official government mailing with language urging immediate action. Some solicitations even make it look like it’s coming from the bank the business uses;
3. Leaving out key details. Third-party promoters of the ERC often don't accurately explain eligibility requirements or how the credit is computed, and they do not share their workpapers with the businesses claiming the credit. They may make broad arguments suggesting that all employers are eligible without evaluating an employer's individual circumstances;
a. For example, only recovery startup businesses are eligible for the ERC in the fourth quarter of 2021, but promoters fail to explain this limit;
b. Also, the promoters may not inform taxpayers that they need to reduce wage deductions claimed on their business' federal income tax return by the amount of the Employee Retention Credit. This causes a domino effect of tax problems for the business;
c. The ERC claim is based on payroll tax filings and the employment of “actual employees” during the periods the ERC was offered. If your tax advisor is telling you that the ERC is available to “all business owners" – even those who did not have employees or file payroll tax returns for the eligible ERC periods – then that is a clear sign of a fraudulent preparer; and
4. Paycheck Protection Program participation. In addition, many of these promoters don't tell employers that they can't claim the ERC on wages that were reported as payroll costs to obtain Paycheck Protection Program loan forgiveness.
For the more than 600,000 credit claims that haven't been processed, the IRS said it is developing a special option that will let taxpayers withdraw their claims. This would help taxpayers who may have been misled by promoters avoid having to repay the credits, it said. The agency has trained auditors examining the claims that pose the greatest risk, and officials are working with the U.S. Department of Justice to address fraud in the program, the agency said. Additionally, the agency is building a special settlement program for taxpayers who received improper credit, Werfel said. It is unclear at this point whether the settlement program would provide full amnesty from criminal prosecution. The IRS is scheduled to release more details on the program later in the Fall.
The fact of the matter is that those targeted by unscrupulous preparers obtained the primary financial benefit of the false ERC claims and are also potential targets in any criminal investigation.
If you believe that you have been the target of an unscrupulous promoter or tax preparer, you should definitely reach out to a Tax Attorney with the requisite experience in dealing with the IRS in civil tax fraud and criminal matters.
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