Deciphering the ERTC Pause: What Businesses Need to Know
What’s Behind the ERTC Moratorium and Steps to Safely Navigate a Claim
On Sept. 14, 2023, the IRS suspended processing new Employee Retention Tax Credit (ERTC) cases until at least Dec. 31, 2023 due to a high volume of questionable claims. As detailed in the news release IR-2023-169, this sudden moratorium is a direct response to mounting concerns from within the tax agency, feedback from tax professionals and media reports. The primary alarm is that a significant portion of the new claims emerging from the older program seem ineligible. Worse, businesses are finding themselves at heightened financial risk, often cornered by aggressive promoters using high-pressure tactics and deceptive marketing strategies.
Promoters have been aggressively marketing the ERTC to business owners, often charging a percentage of the tax credits recovered as a fee. But thousands of claims coming through these promoters have proven to be either fraudulent or ineligible. As of July 31, 2023, IRS Criminal Investigations has initiated 252 investigations involving over $2.8 billion of potentially fraudulent or ineligible ERTC claims.
Unpacking the IRS Moratorium: ERTC Questions Answered
Q: I’m a business owner. How do I know if I’ve fallen victim to one of these bad companies?
A: In light of the rising fraud concerns, the IRS has provided specific indicators that can hint at aggressive and potentially misleading ERTC marketing tactics. These warning signs include:
- Unsolicited Outreach: Random calls or advertisements mentioning an “easy application process” or providing a brief eligibility checklist.
- Overly Simplified Assessments: Claims by the promoter that they can establish your ERTC eligibility in mere minutes.
- Suspicious Fee Structures: Large upfront costs or fees are determined as a percentage of your claimed ERTC refund.
- Lack of Accountability: Preparers unwilling to sign the ERTC return they have completed, leaving only the taxpayer exposed to potential risks.
- Premature Qualification Assurances: Claims that your business is eligible before any in-depth discussion or understanding of your tax situation. Genuine ERTC claims require meticulous evaluation.
- Misleading Advice: Overaggressive suggestions encouraging businesses to file the claim under the guise of having “nothing to lose.” Those who claim the credit incorrectly might face repayment along with hefty interest and penalties.
If any of these red flags apply to your situation, your claim might be at risk.
Q: I have not filed an ERTC claim yet, but I believe that my company may have a valid claim. What should I do?
A: The IRS has not sunset the program completely; instead, they have only placed a hold on processing new claims. While this hold is in place, employers may still file amended payroll returns to claim their eligible credits. The processing time is going to take longer because of the hold, however. If you believe your company may be eligible, or if you are unsure and would like an ERTC assessment performed, contact an Adams Brown advisor.
Q: I’ve already submitted my claim; what should I expect?
A: Those who submitted their claims before the announcement will still have them processed by the IRS, but it will be at a slower pace. Previously, the standard processing time was 90 days, but due to enhanced compliance reviews, it can now take up to 180 days, if not longer in cases needing further review.
Q: I’ve received my tax refund for an ERTC claim but am now doubting its eligibility. What do I do?
A: If you recognize any red flags from your current engagement or if you are in collaboration with a questionable advisor, it is important to reevaluate the claim. Be prepared for any repercussions by assessing the potential risks associated with your filed claim with ERTC professionals.
Q: What if I partnered with a promoter who submitted a false or ineligible claim on my behalf?
A: It’s crucial to consult a reputable tax professional who is well-versed in the intricate ERTC rules. If you have incorrectly claimed the ERTC, you will be required to repay it, and there might be additional penalties and interest. If you are concerned about an ERTC claim that you have already filed, whether or not you have received your refund, Adams Brown can perform an ERTC assessment to help you better understand the viability of your claim and help you formulate a remediation plan if warranted.
Q: Can I withdraw my ERTC claim if it has not been processed yet?
A: The IRS is creating initiatives to assist businesses whom promoters may have misled. They are introducing a withdrawal option for ERTC claims that have yet to be processed, allowing taxpayers to avoid potential repayment issues.
Q: Would withdrawing a fraudulent claim help me avoid enforcement action?
A: Those who have willfully filed fraudulent claims or conspired to do so should be aware that withdrawing a fraudulent claim will not exempt them from potential criminal investigation and prosecution.
The ERTC is incredibly complex, with specific eligibility requirements for credit claims. Employers can claim the ERTC on an original or amended employment tax return for qualified wages paid between March 13, 2020, and Dec. 31, 2021. However, to be eligible, employers must have:
- Sustained a full or partial suspension of operations due to orders from an appropriate governmental authority limiting commerce, travel or group meetings because of Covid-19 during 2020 or the first three quarters of 2021,
- Experienced a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021, or
- Qualified as a recovery startup business for the third or fourth quarters of 2021.
We applaud the IRS for this timely intervention. We are optimistic this moratorium will grant the IRS the bandwidth to address the existing backlog of claims effectively. If you have any questions or need assistance, please contact an Adams Brown advisor.