IRS Hits Pause on Employee Retention Credit Amid Concerns of Scams and Fraud
Introduction:
In a significant move to protect small businesses from potential scams and fraudulent claims, the Internal Revenue Service (IRS) has imposed an immediate stop on processing new claims for the Employee Retention Credit (ERC) until at least the end of the year. The decision, announced by IRS Commissioner Danny Werfel on September 14, 2023, comes in response to mounting concerns about the surge in questionable claims and the aggressive marketing tactics used by promoters.
The Moratorium:
The moratorium is a precautionary measure aimed at safeguarding honest small business owners who may be at risk of falling victim to scams. It is set to run through at least December 31, providing the IRS with the time needed to implement additional safeguards and prevent future abuse of the pandemic-era relief program.
Reasons Behind the Pause:
The IRS expressed growing concerns about the eligibility of a substantial share of new claims, with reports indicating that businesses are being pressured and scammed by aggressive promoters and marketing. The immediate stop aims to protect businesses from financial risks associated with dubious claims and to curb the predatory tactics employed by certain promoters.
Impact on Existing Claims:
While the moratorium is in effect, the IRS will continue to process previously filed ERC claims, but with increased scrutiny. The agency has intensified audit work and criminal investigations on promoters and businesses filing questionable claims. The IRS assures that payouts for existing claims will continue during the moratorium but at a slower pace due to detailed compliance reviews.
Extended Processing Times:
The standard processing goal of 90 days for ERC claims will now extend to 180 days during the moratorium period. Businesses should be prepared for longer processing times, especially if their claims face additional compliance reviews or audits. The IRS may also request additional documentation to ensure the legitimacy of the claims.
Protecting Businesses:
The enhanced compliance review of existing claims is crucial to protect against fraud and prevent businesses from facing penalties or interest payments arising from improper claims. The IRS emphasizes the importance of this measure in maintaining the integrity of the ERC program and the broader tax system.
Future Initiatives:
The IRS is actively working on new initiatives to assist businesses that have fallen victim to aggressive promoters. This includes a settlement program for repayments for those who received an improper ERC payment, with more details expected to be available in the fall.
Withdrawal Option:
In addition to the settlement program, the IRS is finalizing details for a special withdrawal option for businesses that have filed an ERC claim but have not yet been processed. This option aims to help businesses, particularly small ones misled by promoters, avoid possible repayment issues and paying contingency fees to promoters.
Collaboration with the Justice Department:
As part of a wider compliance effort, the IRS is collaborating with the Justice Department to address fraud in the ERC program and take legal action against promoters who have been violating the rules and pressuring businesses to apply.
Conclusion:
The IRS’s decision to halt new Employee Retention Credit processing reflects a commitment to protecting businesses from potential scams and fraud. As the agency works to add more safeguards and address compliance concerns, businesses are urged to exercise caution, review ERC guidelines, and seek guidance from trusted tax professionals. The moratorium serves as a temporary measure to ensure the program’s integrity and prevent further abuse, ultimately safeguarding the interests of honest small business owners.
