The employee retention credit (ERC), a credit created during COVID-19, ended on September 30, 2021 (December 31, 2021, for startups), but it’s still alive. How can that be? The reason: The deadline for submitting refund claims has not expired. Many employers claimed the credit, and a number of these are still pending. But there’s been a lot of fraudulent—or at least erroneous—claims. As of July 31, 2023, IRS-CI had initiated 252 investigations involving over $2.8 billion of potentially fraudulent ERC claims. And this isn’t the end of it. What’s going on?
Overview
The employee retention credit (ERC) was created during the pandemic to help employees keep employees on the payroll. The credit is an employment tax credit that is fully refundable. The credit could have been as high as $5,000 per employee in 2020 and $21,000 in 2021 (for a total credit amount of $26,000 per employee).
The credit had strict eligibility rules. Employers must have had employees and paid wages to them between March 13, 2020, and September 30, 2021 (or December 31, 2021, for startups). And they must have (1) experienced a significant decline in gross receipts, (2) had operations fully or partially suspended by a government order, or (3) was a startup recovery business in the third and fourth quarters of 2021. Supply chain disruptions won’t make an employer eligible, absent meeting one of the three conditions. The IRS has an eligibility checklist.
Eligible employers that didn’t claim the credit when they filed their original employment tax returns can claim it by filing amended employment tax returns. For example, businesses that filed quarterly employment tax returns can file Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, to claim the credit for 2020 and 2021 quarters.
Because of the size of the potential tax recovery from the credit, there’s been a bevy of promoters that are advising small businesses they all qualify, regardless of the facts. The IRS opened its 2023 Dirty Dozen Tax Scams list with a warning about so-called ERC mills. I’ve received calls from business owners approached by such promoters and the owners were tempted to work with the promoters, even though their CPAs told them they didn’t qualify. Some went ahead with ERC refund claims.
Moratorium on claims
On September 14, 2023, the IRS announced a moratorium on processing new claims through December 31, 2023. Previously-filed claims are still being processed—with refunds paid—albeit at a slower pace to give the IRS time for greater scrutiny. The processing of existing ERC claims is going beyond from a standard processing goal of 90 days to 180 days, and much longer if the claims are subject to further review or audit. The IRS could seek additional documentation from the taxpayer to ensure a claim is legitimate.
Withdrawal process
To help small businesses that were victims of ERC mills—scams that told them they qualified for the credit even though that may not have been true—the IRS announced a withdrawal process for pending claims. Small businesses concerned about the accuracy of a submission can withdraw the claim and avoid future repayment, interest, and penalties. Of course, withdrawing a claim that a business knows to be fraudulent does not exempt the business from potential criminal investigation.
Final thought
Small businesses are advised to seek advice from their CPAs or other tax advisers about submitting claims or withdrawing existing claims. Employers that are eligible but haven’t yet filed for a refund need to watch the clock—amended returns for ERC refund for 2020 must be submitted by April 15, 2024, and for all 2021 quarter, by April 15, 2025. Employers that already received refunds should be sure to file amended income tax returns to reduce deductions for wages by the amount of the credit claimed.
