What Is the Employee Retention Credit?
The ERC allows eligible taxpayers to claim a refundable payroll tax credit based on “qualified wages” paid to employees during certain periods between March 13, 2020 and December 31, 2021. The amount of the credit is equal to 50% of the qualified wages, up to a maximum of $10,000 per employee.
Taxpayers could only claim the ERC for calendar quarters in which one or both of the following applied:
- They were subject to a government order that fully or partially suspended their operations because of the COVID-19 pandemic; or
- Their gross receipts were less than 50% of their gross receipts in the same quarter of 2019.
Most employers could claim the ERC if they met the above criteria. Government entities and businesses receiving loans from the Small Business Administration were not eligible.
Why Did the IRS Stop Processing ERC Claims in September 2023?
The ERC stopped being available to most taxpayers at the end of the third calendar quarter in 2021. Some employers could still claim it for the fourth quarter of that year. The IRS continued to accept ERC claims into 2023 on Form 941-X.
The IRS shifted its focus from processing claims to reviewing them for compliance in July 2023 after the agency and tax professionals began to notice a larger volume of ineligible claims. It announced a moratorium on processing new claims that month so it could focus its efforts on identifying and investigating fraud.
What Are the Fraud Concerns Involving the ERC?
The ERC is a complicated tax credit. Eligibility is based on specific circumstances that took place three or four years ago during a particularly hectic time for many employers. The IRS is concerned that various promoters were encouraging businesses to file ERC claims regardless of their actual eligibility, often by making false representations about how the program works.
The IRS found itself overwhelmed by the volume of ERC claims, each of which would require careful review. By September 2023, the agency reported that it had received around 3.6 million ERC claims since the program began.
What Is the IRS Doing to Address Potential ERC Fraud?
Since 2023, the IRS has taken several measures to deal with possible fraud. It estimates that its compliance efforts have covered more than $2 billion in that time.
Voluntary Disclosure
The ERC Voluntary Disclosure Program (ERC-VDP) was available to taxpayers who had received payment for an ERC claim despite being ineligible. Taxpayers could avoid further consequences if they repaid at least 80% of the credit. By the time the ERC-VDP ended in March 2024, more than 2,600 taxpayers had disclosed about $1.09 billion.
Claim Withdrawal
An ongoing program allows taxpayers to withdraw an ERC claim if:
- The IRS has not processed the claim; or
- The taxpayer received payment but has not cashed or deposited it.
The IRS reports that over 4,800 taxpayers have withdrawn claims totaling $531 million.
Assessments, Audits and Criminal Investigations
As of late June 2024, the IRS reported that it had identified more than 22,000 improper claims from over 12,000 taxpayers. This had resulted in assessments totaling about $572 million. It also had 450 criminal cases underway that cover around $7 billion in claims.
Risk Classifications and Warning Signs
The IRS has created informal risk categories for the remaining ERC claims that it received prior to the 2023 moratorium. It based the categories on how the claims appear on their faces:
- High-risk: 10% to 20% of claims “show clear signs of being erroneous.”
- “Unacceptable level of risk”: 60% to 70% of claims show “risk indicators” that merit scrutiny.
- Low-risk: 10% to 20% of claims show no “eligibility warning signs” and will soon receive “judicious processing” by the IRS.
Earlier this year, the agency published a list of warning signs that indicate a possibly improper or fraudulent ERC claim:
- A claim covers too many calendar quarters.
- A claim is based on an ineligible government order, such as one that did not order a “full or partial suspension” of the taxpayer’s business.
- A claim tries to cover all employees or all wages paid during a quarter.
- A claim cites “supply chain issues” as the basis for eligibility.
- A business files a claim for a quarter when it did not pay taxes or did not exist.
Contact Frankel to learn more about how we can support you and your business at www.frankel.cpa or call us at (402) 469-9100.
