Over the last few months, the IRS has issued several warnings to businesses about the increasing number of scammers convincing owners to apply for the Employee Retention Tax Credit (ERTC). While the ERTC is one of the last pandemic era tax incentives still available, there has been a steady increase in ineligible claims made. Unsuspecting business owners have been convinced to apply for the federal tax credit completely unaware of the fact that funds awarded in error need to be repaid often with penalties and interest.
After mounting concerns about these claims and the potential damage to business owners, the IRS announced a claims processing moratorium through, at least, the end of 2023. The agency highlights “aggressive marketing” and the “unacceptable risk” to businesses and the tax system alike as a driving force for the move. While new claims will not be processed for some time, the agency confirmed existing claims will be reviewed and acted upon. To help clients, prospects, and others, Selden Fox has provided a summary of the key details below.
Current State of ERTC
ERTC was launched during the pandemic as an incentive for businesses that continued to pay employees despite experiencing a full or partial suspension of operations. This could have been due either to a government order or to significant decreases in gross receipts during relevant eligibility periods. During the program, the IRS received about 3.6 million claims.
While the beginning of the program rollout was able to benefit many businesses, the IRS is receiving more applications because of misleading advertising campaigns that bill the program as “risk-free.” Even worse, promoters are collecting up to 25% in contingency fees from ERTC refunds, walking away with money while the businesses are left to pay the entirety back if found to be ineligible.
How is the IRS Dealing with Fraudulent Activity?
Previously filed claims continued to be processed. However, the IRS has put a stop to processing any new ERTC claims that come through due to the increased frequency of fraudulent claims activity.
However, this is not generally the fault of business owners themselves, but instead a result of aggressive marketing campaigns that target ineligible organizations. In July, the IRS said it would be changing its focus to reviewing ERTC claims for compliance issues and fraudulent activity.
Because of the increased concerns over dubious claims, current applications that are being processed will likely take longer, as well. Currently, the IRS is working on hundreds of criminal cases related to ERTC. Thousands of claims are being audited. Businesses with legitimate applications can expect to wait 90 to 180 days, or perhaps longer, for their claim to be reviewed and approved.
Later this fall, the IRS plans to release details on new initiatives designed to help businesses that fell victim to promotional campaigns, including a settlement program for repayments.
A withdrawal option will also be made available soon for businesses that have filed an ERTC claim that has not yet been processed. This is meant to protect businesses that may have been taken in by misleading advertising but is not meant to protect those who have conspired to file fraudulent claims or willfully filed in another manner.
What Should Businesses Do During the ERTC Moratorium?
IRS Commissioner Danny Werfel advised businesses that have felt pressured by advertisers to apply for the ERTC to “immediately pause and review their situation” and work with tax professionals that understand the complexities of the tax credit before applying.
Businesses that improperly file and receive ERTC payments will be required to pay them back, sometimes with penalties. The moratorium is designed to prevent this from happening.
Basic ERTC Eligibility Guidelines
The best defense businesses have against filing inappropriately comes from talking to an experienced tax professional. However, basic criteria for eligibility includes the following:
- Businesses that experienced full or partial operations suspension coming from an “appropriate government authority” that limited activity due to COVID-19 during either 2020 or the first three quarters of 2021.
- Companies that had declines in gross receipts in 2020 or the first three quarters of 2021.
- Organizations that were qualified as recovery startup businesses in the third or fourth quarters of 2021.
What to Look Out for From Promoters
The IRS has listed a number of red flags on its website for businesses that may be the victim of erroneous marketing campaigns. These warning signs include:
- Promoters claiming that there is an “easy application process.”
- A guarantee that ERTC eligibility can be determined in minutes.
- Fees that receive a percentage of the ERTC refund amount, as previously mentioned, these promoters may claim up to 25%.
- Mention of eligibility before in-depth discussions about business operations.
- Promoters looking for anonymity and not signing the ERTC return, instead asking the business to do it.
Chicago area businesses that receive messaging via direct mail, or those that hear about ERTC credits on the radio, television, social media, or phone, should be skeptical. While the program did help many businesses, especially in the early days of the pandemic, it’s not a “too good to be true” tax credit. The ERTC is complex and requires the guidance of a skilled professional to determine eligibility.
If you have questions about the information outlined above, Selden Fox can help. For additional information call 630.954.1400 or click here to contact us. We look forward to speaking with you soon.