To paraphrase a gazillion social media posts, exploitative people are why we can't have needed tax breaks.
OK, Congress plays a big part. And the Internal Revenue Service too often steps on its own tax toes.
But in many cases, unscrupulous people mess things up for the rest of us who are just trying to comply with tax laws and get a little bit of legitimate tax relief along the way.
That's what happened with the Employee Retention Credit (ERC).
This refundable tax credit was created by lawmakers to help businesses that were struggling during the height of the COVID-19 pandemic, back in 2020 and 2021. The ERC allowed eligible small businesses to get thousands of dollars per employee that they kept on payroll.
But, like a lot of tax laws, it's complex. That's led to, as you've probably heard by now, like in my May post Business owners should look carefully at ERC promotions, unscrupulous promoters aggressively marketing ERC claims and filing them for companies that don't qualify.
The IRS has decided to put a stop to that by ending the processing of all new claims. The moratorium was announced, and took effect, on Sept. 14. IRS Commissioner Danny Werfel said it would remain through at least the end of the year.
Increasing evidence of fraud: The IRS action follows what it says is a "substantial share" of new claims from the years-old program that are ineligible.
In addition, the IRS says a growing number of businesses are being put at financial risk by aggressive promoters and marketing pitches that pressure them into making dubious claims.
"The IRS is increasingly alarmed about honest small business owners being scammed by unscrupulous actors, and we could no longer tolerate growing evidence of questionable claims pouring in," Werfel said.
"The further we get from the pandemic, the further we see the good intentions of this important program abused," added the commissioner. "The continued aggressive marketing of these schemes is harming well-meaning businesses and delaying the payment of legitimate claims, which makes it harder to run the rest of the tax system. This harms all taxpayers, not just ERC applicants."
Prior claims will be processed, possibly audited: The tax agency will process ERC claims before the moratorium was announced.
But, noted the commissioner, increased fraud concerns mean that the processing time for these earlier claims will take longer. The IRS already announced back in July that it was increasingly shifting its focus to review these claims for compliance concerns.
With these stricter compliance reviews in place, existing ERC claims will go from a standard processing goal of 90 days to 180 days, and much longer if the claim faces further review or audit.
And this is not the end. The IRS plans to add new protections and safeguards to stop bad ERC claims from ever coming in, said Werfel.
As for businesses, if you filed a questionable ERC claim at the urging of a dodgy promoter, don't be surprised if you hear from an IRS examiner. In many cases, the IRS may seek additional documentation from the taxpayer to ensure the claim is legitimate.
Those requests for added info is part of the IRS' intensifying audit work, as well as increased criminal investigations of promoters and businesses filing dubious claims. Hundreds of criminal cases are under investigation, according to the agency, and thousands of ERC claims have been referred for audit.
Shouting out ERC moratorium details: Coverage of the IRS' ERC claim moratorium earns this weekend's Saturday Shout Outs. Below are some media stories, both general and from tax pros, on the IRS decision.
- I.R.S. Freezes Pandemic-Era Tax Credit Amid Fraud Fears (no paywall link) by Alan Rappeport for The New York Times;
- IRS Shuts Door on New Pandemic Tax Credit Claims Until at Least 2024 (no paywall link) by Richard Rubin for The Wall Street Journal;
- IRS Won't Process New Employee Retention Credit (ERC) Claims by Kelley R. Taylor for Kiplinger;
- IRS halts processing of a small business tax break amid ‘surge of questionable claims' by Kate Dore for CNBC; and
- Moratorium imposed on new ERC claim processing to curb abuse by Martha Waggoner for The Journal of Accountancy
You also can go straight to the source.
The IRS' Sept. 14 press release, To protect taxpayers from scams, IRS orders immediate stop to new Employee Retention Credit processing amid surge of questionable claims; concerns from tax pros, has details and links to resources at IRS.gov.
I want to highlight shout out a couple of those additional tax agency resources.
The IRS has updated its ERC frequently asked questions page.
Then there are the warning signs of aggressive ERC promotion.
Finally, the IRS has created a new ERC eligibility checklist. This online reference tool, which includes a table of eligibility questions paired with next steps, provides a quick way for employers to figure out if they might qualify to claim the ERC or if they potentially need to resolve an improper claim. There's also a printable PDF version.
Meanwhile, the IRS chief has some advice for businesses.
"For those people being pressured by promoters to apply for the Employee Retention Credit, I urge them to immediately pause and review their situation…," said Werfel. "In the meantime, businesses should seek out a trusted tax professional who actually understands the complex ERC rules, not a promoter or marketer hustling to get a hefty contingency fee."
You also might find these items of interest:
- Being the boss tax basics
- Tips if the IRS audits your business' ERC claim
- Business owners should look carefully at ERC promotions
- AI will be part of expansive IRS crackdown on wealthy, corporate tax evaders
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