IRS’s ERC Moratorium: A Closer Look at Recent Tax Credit Developments

November 22 , 2023

On September 14, 2023, the IRS issued a press release, announcing its immediate implementation of a moratorium on the processing of new ERC claims until December 31, 2023. This significant step was taken to address the growing issue of questionable Employee Retention Credit (ERC) claims and safeguard the integrity of this critical pandemic-related tax credit program.

ERC Moratorium

The IRS’s decision to impose a moratorium on the processing of new ERC claims is a response to a concerning trend—a significant increase in the submission of suspicious claims. This action is aligned with the ERC’s primary purpose, which was introduced under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The ERC’s primary goal is to provide substantial financial support to businesses adversely affected by the COVID-19 pandemic.

Initially, the ERC offered a 50 percent refundable tax credit for qualified wages paid in 2020. In March 2021, the American Rescue Plan Act enhanced the ERC by raising the credit rate to 70 percent for qualified wages in 2021.Employers still have the opportunity to apply for this credit retroactively, with a maximum of $26,000 attainable per eligible employee.

While claims submitted before September 14, 2023, will continue to be processed, they will now undergo a more rigorous review, potentially leading to longer processing times. The IRS, which had aimed for a 90-day processing window, is extending it to 180 days, with the possibility of further delays if additional documentation or scrutiny is necessary. This enhanced scrutiny is implemented to ensure that only valid claims, aligning with the ERC’s purpose of providing support to businesses in need, receive approval.

The IRS has issued a warning to taxpayers, emphasizing that any improperly disbursed ERC funds must be repaid, with the potential for interest and penalties. For those who have already paid substantial contingency fees, the path to rectification may pose additional challenges.

New Initiatives on the Horizon

Recognizing that businesses may inadvertently fall victim to unscrupulous promoters, the IRS is launching initiatives to provide recourse. One such initiative is a repayment settlement program for businesses that received improper ERC payments, offering a path towards resolution. Additionally, the IRS is finalizing details for a special withdrawal option for businesses with pending ERC claims, allowing them to avoid potential repayment issues and predatory promoter fees. It’s imperative to note that this option does not shield businesses from possible criminal investigations in cases of willfully filed fraudulent claims.

Navigating the ERC Landscape

In the midst of these developments, the IRS has provided businesses with valuable tools to navigate the ERC claims process. The newly released ERC Eligibility Checklist serves as a resource for employers, aiding them in assessing their eligibility for the ERC. Nevertheless, the IRS reiterates the importance of engaging trusted tax professionals for guidance in claiming this credit, given its multifaceted nature.

IRS Recommendations

The IRS offers several pieces of advice for businesses regarding the ERC:

1. Pending Applications: Businesses with pending ERC applications should review available options to address their current situation.
2. Consider Reviewing Guidelines: If a business hasn’t filed an ERC claim yet, they should carefully review the ERC guidelines during the processing moratorium. Consulting with a trusted tax professional is recommended to avoid complications.
3. Withdraw Existing Claims: Businesses that have already filed and have a pending claim should review program guidelines with a tax professional and check the new question and answer guide. If they believe their claim was submitted improperly, they can withdraw it, even if it’s under audit.
4. Wait for ERC Settlement Program: The IRS will be finalizing an ERC settlement program in the fall for businesses that have received an ERC refund they believe is in error. This program will allow businesses to repay ERC claims and avoid penalties and future compliance actions.
5. Beware of Promoter Contingency Fees: Businesses should be cautious of promoter contingency fees paid from ERC payments, and the IRS is assessing how to handle such cases.

Special Withdrawal Process for ERC Claimants

The new ERC claim withdrawal option allows certain employers who have filed an ERC claim but haven’t received a refund to withdraw their submission, thus avoiding future repayment, interest, and penalties. This option is particularly beneficial for small business owners and others who may have been pressured or misled into filing ineligible claims by ERC marketers or promoters. Claims that are withdrawn will be treated as if they were never filed, and the IRS will not impose penalties or interest for these withdrawals.

Eligibility for ERC Claim Withdrawal

Employers can utilize the ERC claim withdrawal process if the following conditions apply:

• They made the claim on an adjusted employment return (Forms 941-X, 943-X, 944-X, CT-1X).
• The adjusted return was solely filed to claim the ERC, with no other adjustments made.
• They wish to withdraw the entire amount of their ERC claim.
• The IRS has not yet paid their claim, or the IRS has paid the claim, but they haven’t cashed or deposited the refund check.

Taxpayers who do not meet these eligibility criteria can still address their ERC claim by reducing or eliminating it through the process of filing an amended return.

How to Withdraw an ERC Claim

To initiate the withdrawal process:

• Consult Your Payroll Company: If your ERC claim was filed by a professional payroll company, get in touch with them. They may need to submit the withdrawal request on your behalf, depending on how the claim was filed (individually or in a batch with others).
• If Not Under Audit: If your ERC claim hasn’t been paid by the IRS, you haven’t cashed the refund check, and you haven’t been notified that your claim is under audit, fax your withdrawal request to the IRS using a computer or mobile device. The IRS has a dedicated fax line for this purpose, ensuring that processing is halted before refund approval.
• Under Audit: If you’ve been notified that you’re under audit, send the withdrawal request directly to the assigned examiner or respond to the audit notice if an examiner hasn’t been assigned yet.
• For Uncashed Refund Checks: If you’ve received a refund check but haven’t cashed it, you can still withdraw your claim. Follow the provided instructions at IRS.gov/withdrawmyerc and mail the voided check along with your withdrawal request.

ERC Program Guidance

In conclusion, the IRS’s imposition of a moratorium on new ERC claims reflects a complex web of factors, from legislative evolution to the need for enhanced fraud protection. Businesses, now more than ever, must exercise diligence and seek professional expertise when navigating the intricacies of the ERC program. The road ahead may be challenging, but with the right guidance, legitimate claimants can continue to benefit from this essential relief measure.