Frost Law
Just last week, it was reported that the IRS confirmed what many had suspected for weeks: “The IRS has slowed our processing of [ERC] claims to guard against fraudulent or incorrect submissions as we work to enhance our procedures and controls to best protect small-business owners and taxpayer dollars.”1 Yesterday, September 14, 2023, the IRS dramatically escalated the situation by placing an immediate moratorium on the processing of new ERC claims through “at least the end of the year.”2 According to the IRS:
IRS Commissioner Danny Werfel ordered the immediate moratorium, beginning today, to run through at least Dec. 31 following growing concerns inside the tax agency, from tax professionals as well as media reports that a substantial share of new claims from the aging program are ineligible and increasingly putting businesses at financial risk by being pressured and scammed by aggressive promoters and marketing.3
The IRS clarified that it “continues to work previously filed Employee Retention Credit (ERC) claims received prior to the moratorium but [. . .] increased fraud concerns means processing times will be longer.”4
Unfortunately, while the IRS has placed new ERC filings in this state of limbo, for the thousands of business owners desperately waiting on those claims . . . well . . . it is more akin to a special kind of financial hell. Across the nation, thousands of employers can relate to scenarios like this (or worse):
Barely Surviving Brick Oven Pizza (which has 20 employees in 2 locations)struggled throughout the pandemic but retained employees. The owner was immensely relieved to hear his accountant confirm that the company was eligible for ERC.
The company filed amended tax returns for a $100,000 ERC amount for 2020. Barely Surviving Brick Oven Pizza paid the accountant $10,000 for her work months ago but still hasn’t received the ERC funds.
Moreover, since the company is not permitted to deduct wages subsidized with ERC from its income taxes, Barely Surviving Brick Oven Pizza is temporarily paying a higher income-tax bill while it waits for the IRS to issue the refund. Stated differently, the company already reduced its wage expense by the pending ERC amount. [Here, assume Barely Surviving Brick Oven Pizza had taxable income in 2020 (or incurred a loss less than the ERC claimed), and now the reduction of wage expense means an increase in its federal taxable income for the corresponding year.]
Remember, many of the employers like those described above have yet to fully recover from the worst of the pandemic, and with another COVID surge in the news, ERC relief can’t come fast enough. But what does the moratorium mean for the numerous employers who are still in the early stages of applying for the credit, as well as untold employers who haven’t taken a single step in the process, whether they are undecided or still just learning about the opportunity? Just how long will this ERC “timeout” last . . . or is something more permanent in the works? In fact, many people are beginning to wonder if there are serious, high-level efforts to effectively kill the ERC.
Let’s reflect on the events that led us to this point. Briefly, the ERC is a refundable payroll tax credit for businesses (and tax-exempt organizations) that retained employees and were affected during the COVID pandemic. While it is only available to eligible employers for certain periods in 2020 and 2021, businesses may still have time to claim ERC retroactively.
Certainly, when the ERC was implemented in early 2020, businesses and the IRS were being impacted by the pandemic in numerous ways. Businesses were failing and jobs were at stake. But it’s easy to forget that the IRS was also confronting the direct effects of COVID on its own personnel and operations. Moreover, the IRS was charged with not only administering ERC, but also issuing rounds of Economic Impact Payments, and managing business as usual (amplified by a noticeable uptick in anxious taxpayer communications). Considering these circumstances and the indisputably complex nature of the ERC, it is not surprising that the IRS, tax professionals, and business owners were all generally late in the game to recognize the full scope of risks and rewards.
By January 2023, however, millions of ERC claims had been filed, and the IRS believed it had seen enough fraudulent claims and unscrupulous “ERC Mills” to warrant the ERC’s inclusion on the IRS’s annual Dirty Dozen list. Concurrently, the IRS increased its enforcement efforts directed at fraudulent claims and issued a flurry of new warnings about potential scams and bad actors. In the summer of 2023, the IRS had shifted resources to clear the ERC backlog (at that time, approximately 800,000 claims) in order to be able to more carefully scrutinize the incoming claims. Indeed, at this point, the IRS’s perspective is that “the percentage of legitimate claims coming in is declining.”6
It’s fair to point out, though, that the IRS’s recent presumption that “the percentage of legitimate claims coming in is declining” doesn’t appear to factor in the real consequences of the failure on the IRS’s part to fulfill its mandated role in an ERC “Public Awareness Campaign.”
As amended by the Consolidated Appropriations Act of 2021, the CARES Act required the IRS to work in tandem with the SBA, to provide information regarding ERC availability—especially aimed at employers that reported employing 500 or fewer employees on the most recently filed quarterly employment tax return. However, the IRS did not do this, and as a result, businesses now discovering the information are simultaneously apprehensive to claim the credit due to all of the IRS warnings aimed at bad actors.
Of course, a ticking clock is adding pressure on both sides. Under current law, employers may only file amended returns to claim ERC for 2020 periods until April 15, 2024. For 2021 periods, employers have until April 15, 2025. Significantly, excluding the 3rd and 4th quarters of 2021, those same deadlines apply to the IRS’s ability to assess additional tax for a potential erroneous ERC claim. Note that the 3rd and 4th quarters of 2021, were expanded to allow the IRS time to assess until April 15, 2027. While employers—especially those who are only recently learning about the credit—may feel a time crunch to review the complex credit with a trustworthy preparer and get everything filed within those limits, the IRS undoubtedly fears the time remaining is long enough to exponentially increase the number of fraudulent filings.
And here we are . . . years later, COVID alarms still ringing in our ears, millions of claims filed, billions of dollars paid out, untold amounts awaiting IRS processing, congressional estimates shattered, and increasing speculation that something might just break.
The IRS made it clear in its moratorium announcement that it is doing more than simply slowing down ERC processing to more carefully scrutinize claims and freezing the processing of new claims altogether. One thing we know for certain is that the IRS stated that it “will be providing additional details on [a] settlement program in the fall that will allow businesses to repay ERC claims.”6
While we wait for more details about the settlement program to arrive, we can state that, generally, the idea behind Voluntary Disclosure Programs (VDPs) in the tax world is to provide taxpayers with pathways to compliance while minimizing their potential criminal exposure. An ERC VDP would presumably appeal especially to those employers who fell victim to ERC mills. Similarly, many tax professionals have voiced support for an ERCVDP, believing it would help them provide their clients with more clarity as to what they can expect once they come forward.7
Note that in the moratorium announcement, the IRS also indicated that it will permit employers with pending, unpaid ERC claims to“ withdraw” them and will let many repay their refunds if they no longer think they qualify. As stated in the announcement:
In addition, the IRS is finalizing details that will be available soon for a special withdrawal option for those who have filed an ERC claim but the claim has not been processed. This option – which can be used by taxpayers whose claim hasn't yet been paid– will allow the taxpayers, many of them small businesses who were misled by promoters, to avoid possible repayment issues and paying promoters contingency fees. Filers of these more than 600,000 claims awaiting processing will have this option available. Those who have willfully filed fraudulent claims or conspired to do so should be aware, however, that withdrawing a fraudulent claim will not exempt them from potential criminal investigation and prosecution.8
Meanwhile, speculations about what else might be in the works are more frequently featured in ERC conversations and often include one or more of the following fates: (1) an expanded assessment statute of limitations; (2) an early end to the ERC; and (3) the potential for this overall ERC experience to result in the ultimate regulation of return preparers in every tax context, not just where the ERC is at play.
The current administration’s fiscal year 2024 budget proposes to allow more time for the IRS to assess the 2020 quarters and the first two quarters of 2021. Instead of the current three-year limit, the IRS would have five years (just like it does with the 3rd and 4th quarters of 2021) to assess additional tax. Of course, this would require action on the part of Congress, and there’s been no indication that Congress is inclined to do this.
On July 25, 2023, at a tax roundtable in Atlanta, Commissioner Werfel made it abundantly clear that it is already increasing scrutiny on ERC claims and shifting its focus to increasing enforcement action. Importantly, he also expressed that he was working with Treasury to “explore legislative solutions” for Congress to implement to help curtail fraudulent ERC claims. He continued to hint that “an earlier ending date for businesses to claim the credit and increase IRS oversight of return preparers,” could be on the table.
At this point in time, though, it is worth remembering that just two days after that roundtable, the House Ways and Means Oversight Committee held a about the ERC and most listeners walked away with the understanding that Congress is not eager to kill employers’ ability to claim the credit before the 2025 deadline. Indeed, representatives from both sides of the aisle seemed especially cognizant of the fact that small businesses and nonprofits really need the full amount of time to file amended claims due to the complexity and lack of guidance early on.
Undoubtedly, the ERC experience has generated renewed interest in IRS regulation of paid return preparers. While enrolled preparers have professional credentials to indicate to the IRS and others that they are competent, the majority of “unenrolled” preparers do not. Perhaps few other tax events have illustrated quite so clearly: (1) how little filers actually know about the competency levels of their chosen preparers, and (2) the extent of the burden filers bear if their preparer is wrong.
The scourge of ERC mills, and the damage they are causing, may ultimately lead to the regulation of the tax return preparation industry. Many are calling for Congress to act and grant the IRS the authority to regulate, thereby reducing errors and outright fraud. Reports indicate that concurrent with yesterday’s processing moratorium, Deputy Treasury Secretary Wally Adeyemo sent a letter to the Senate Finance Committee wherein he urged Congress to authorize the IRS to regulate paid tax return preparers.
Yes, the IRS has officially placed an immediate moratorium on the processing of new ERC claims through “at least the end of the year.” It has slowed ERC processing for those already filed claims, and it is focusing on anti-fraud measures and correcting errors. Like all proper timeouts, it’s a good time for all parties to reflect on how we arrived where we are and, what needs to be done going forward. And while initial reflections take us to the points discussed above, including an early end to the ERC, there’s another important point of consideration that deserves attention. In our upcoming post, we will look more closely at whether the IRS issued forms of ERC guidance in accordance with the Administrative Procedure Act, or whether they are legally vulnerable.
Significantly, many believe that the moratorium reflects a notable pivot in the Treasury’s and IRS’s posture with regard to the ERC more generally. During the first year of the ERC’s debut, it was not uncommon to see language like the following from the Department of Treasury: “The employee retention tax credit is a broad-based refundable tax credit designed to encourage employers to keep employees on their payroll.”9 (Emphasis added). In contrast, when the IRS discusses the ERC today, the context is much less about a credit that is “broad-based” but rather more about a credit that is broadly misused.
Lastly, while the moratorium is in place, we continue to remind businesses that the ERC is a complex claim with specific and exacting requirements. We maintain that businesses should seek out a trusted tax professional—a professional who, as described by the IRS yesterday, “actually understands the complex ERC rules, not a promoter or marketer hustling to get a hefty contingency fee.”10
Just last week, it was reported that the IRS confirmed what many had suspected for weeks: “The IRS has slowed our processing of [ERC] claims to guard against fraudulent or incorrect submissions as we work to enhance our procedures and controls to best protect small-business owners and taxpayer dollars.”1 Yesterday, September 14, 2023, the IRS dramatically escalated the situation by placing an immediate moratorium on the processing of new ERC claims through “at least the end of the year.”2 According to the IRS:
IRS Commissioner Danny Werfel ordered the immediate moratorium, beginning today, to run through at least Dec. 31 following growing concerns inside the tax agency, from tax professionals as well as media reports that a substantial share of new claims from the aging program are ineligible and increasingly putting businesses at financial risk by being pressured and scammed by aggressive promoters and marketing.3
The IRS clarified that it “continues to work previously filed Employee Retention Credit (ERC) claims received prior to the moratorium but [. . .] increased fraud concerns means processing times will be longer.”4
Unfortunately, while the IRS has placed new ERC filings in this state of limbo, for the thousands of business owners desperately waiting on those claims . . . well . . . it is more akin to a special kind of financial hell. Across the nation, thousands of employers can relate to scenarios like this (or worse):
Barely Surviving Brick Oven Pizza (which has 20 employees in 2 locations)struggled throughout the pandemic but retained employees. The owner was immensely relieved to hear his accountant confirm that the company was eligible for ERC.
The company filed amended tax returns for a $100,000 ERC amount for 2020. Barely Surviving Brick Oven Pizza paid the accountant $10,000 for her work months ago but still hasn’t received the ERC funds.
Moreover, since the company is not permitted to deduct wages subsidized with ERC from its income taxes, Barely Surviving Brick Oven Pizza is temporarily paying a higher income-tax bill while it waits for the IRS to issue the refund. Stated differently, the company already reduced its wage expense by the pending ERC amount. [Here, assume Barely Surviving Brick Oven Pizza had taxable income in 2020 (or incurred a loss less than the ERC claimed), and now the reduction of wage expense means an increase in its federal taxable income for the corresponding year.]
Remember, many of the employers like those described above have yet to fully recover from the worst of the pandemic, and with another COVID surge in the news, ERC relief can’t come fast enough. But what does the moratorium mean for the numerous employers who are still in the early stages of applying for the credit, as well as untold employers who haven’t taken a single step in the process, whether they are undecided or still just learning about the opportunity? Just how long will this ERC “timeout” last . . . or is something more permanent in the works? In fact, many people are beginning to wonder if there are serious, high-level efforts to effectively kill the ERC.
Let’s reflect on the events that led us to this point. Briefly, the ERC is a refundable payroll tax credit for businesses (and tax-exempt organizations) that retained employees and were affected during the COVID pandemic. While it is only available to eligible employers for certain periods in 2020 and 2021, businesses may still have time to claim ERC retroactively.
Certainly, when the ERC was implemented in early 2020, businesses and the IRS were being impacted by the pandemic in numerous ways. Businesses were failing and jobs were at stake. But it’s easy to forget that the IRS was also confronting the direct effects of COVID on its own personnel and operations. Moreover, the IRS was charged with not only administering ERC, but also issuing rounds of Economic Impact Payments, and managing business as usual (amplified by a noticeable uptick in anxious taxpayer communications). Considering these circumstances and the indisputably complex nature of the ERC, it is not surprising that the IRS, tax professionals, and business owners were all generally late in the game to recognize the full scope of risks and rewards.
By January 2023, however, millions of ERC claims had been filed, and the IRS believed it had seen enough fraudulent claims and unscrupulous “ERC Mills” to warrant the ERC’s inclusion on the IRS’s annual Dirty Dozen list. Concurrently, the IRS increased its enforcement efforts directed at fraudulent claims and issued a flurry of new warnings about potential scams and bad actors. In the summer of 2023, the IRS had shifted resources to clear the ERC backlog (at that time, approximately 800,000 claims) in order to be able to more carefully scrutinize the incoming claims. Indeed, at this point, the IRS’s perspective is that “the percentage of legitimate claims coming in is declining.”6
It’s fair to point out, though, that the IRS’s recent presumption that “the percentage of legitimate claims coming in is declining” doesn’t appear to factor in the real consequences of the failure on the IRS’s part to fulfill its mandated role in an ERC “Public Awareness Campaign.”
As amended by the Consolidated Appropriations Act of 2021, the CARES Act required the IRS to work in tandem with the SBA, to provide information regarding ERC availability—especially aimed at employers that reported employing 500 or fewer employees on the most recently filed quarterly employment tax return. However, the IRS did not do this, and as a result, businesses now discovering the information are simultaneously apprehensive to claim the credit due to all of the IRS warnings aimed at bad actors.
Of course, a ticking clock is adding pressure on both sides. Under current law, employers may only file amended returns to claim ERC for 2020 periods until April 15, 2024. For 2021 periods, employers have until April 15, 2025. Significantly, excluding the 3rd and 4th quarters of 2021, those same deadlines apply to the IRS’s ability to assess additional tax for a potential erroneous ERC claim. Note that the 3rd and 4th quarters of 2021, were expanded to allow the IRS time to assess until April 15, 2027. While employers—especially those who are only recently learning about the credit—may feel a time crunch to review the complex credit with a trustworthy preparer and get everything filed within those limits, the IRS undoubtedly fears the time remaining is long enough to exponentially increase the number of fraudulent filings.
And here we are . . . years later, COVID alarms still ringing in our ears, millions of claims filed, billions of dollars paid out, untold amounts awaiting IRS processing, congressional estimates shattered, and increasing speculation that something might just break.
The IRS made it clear in its moratorium announcement that it is doing more than simply slowing down ERC processing to more carefully scrutinize claims and freezing the processing of new claims altogether. One thing we know for certain is that the IRS stated that it “will be providing additional details on [a] settlement program in the fall that will allow businesses to repay ERC claims.”6
While we wait for more details about the settlement program to arrive, we can state that, generally, the idea behind Voluntary Disclosure Programs (VDPs) in the tax world is to provide taxpayers with pathways to compliance while minimizing their potential criminal exposure. An ERC VDP would presumably appeal especially to those employers who fell victim to ERC mills. Similarly, many tax professionals have voiced support for an ERCVDP, believing it would help them provide their clients with more clarity as to what they can expect once they come forward.7
Note that in the moratorium announcement, the IRS also indicated that it will permit employers with pending, unpaid ERC claims to“ withdraw” them and will let many repay their refunds if they no longer think they qualify. As stated in the announcement:
In addition, the IRS is finalizing details that will be available soon for a special withdrawal option for those who have filed an ERC claim but the claim has not been processed. This option – which can be used by taxpayers whose claim hasn't yet been paid– will allow the taxpayers, many of them small businesses who were misled by promoters, to avoid possible repayment issues and paying promoters contingency fees. Filers of these more than 600,000 claims awaiting processing will have this option available. Those who have willfully filed fraudulent claims or conspired to do so should be aware, however, that withdrawing a fraudulent claim will not exempt them from potential criminal investigation and prosecution.8
Meanwhile, speculations about what else might be in the works are more frequently featured in ERC conversations and often include one or more of the following fates: (1) an expanded assessment statute of limitations; (2) an early end to the ERC; and (3) the potential for this overall ERC experience to result in the ultimate regulation of return preparers in every tax context, not just where the ERC is at play.
The current administration’s fiscal year 2024 budget proposes to allow more time for the IRS to assess the 2020 quarters and the first two quarters of 2021. Instead of the current three-year limit, the IRS would have five years (just like it does with the 3rd and 4th quarters of 2021) to assess additional tax. Of course, this would require action on the part of Congress, and there’s been no indication that Congress is inclined to do this.
On July 25, 2023, at a tax roundtable in Atlanta, Commissioner Werfel made it abundantly clear that it is already increasing scrutiny on ERC claims and shifting its focus to increasing enforcement action. Importantly, he also expressed that he was working with Treasury to “explore legislative solutions” for Congress to implement to help curtail fraudulent ERC claims. He continued to hint that “an earlier ending date for businesses to claim the credit and increase IRS oversight of return preparers,” could be on the table.
At this point in time, though, it is worth remembering that just two days after that roundtable, the House Ways and Means Oversight Committee held a about the ERC and most listeners walked away with the understanding that Congress is not eager to kill employers’ ability to claim the credit before the 2025 deadline. Indeed, representatives from both sides of the aisle seemed especially cognizant of the fact that small businesses and nonprofits really need the full amount of time to file amended claims due to the complexity and lack of guidance early on.
Undoubtedly, the ERC experience has generated renewed interest in IRS regulation of paid return preparers. While enrolled preparers have professional credentials to indicate to the IRS and others that they are competent, the majority of “unenrolled” preparers do not. Perhaps few other tax events have illustrated quite so clearly: (1) how little filers actually know about the competency levels of their chosen preparers, and (2) the extent of the burden filers bear if their preparer is wrong.
The scourge of ERC mills, and the damage they are causing, may ultimately lead to the regulation of the tax return preparation industry. Many are calling for Congress to act and grant the IRS the authority to regulate, thereby reducing errors and outright fraud. Reports indicate that concurrent with yesterday’s processing moratorium, Deputy Treasury Secretary Wally Adeyemo sent a letter to the Senate Finance Committee wherein he urged Congress to authorize the IRS to regulate paid tax return preparers.
Yes, the IRS has officially placed an immediate moratorium on the processing of new ERC claims through “at least the end of the year.” It has slowed ERC processing for those already filed claims, and it is focusing on anti-fraud measures and correcting errors. Like all proper timeouts, it’s a good time for all parties to reflect on how we arrived where we are and, what needs to be done going forward. And while initial reflections take us to the points discussed above, including an early end to the ERC, there’s another important point of consideration that deserves attention. In our upcoming post, we will look more closely at whether the IRS issued forms of ERC guidance in accordance with the Administrative Procedure Act, or whether they are legally vulnerable.
Significantly, many believe that the moratorium reflects a notable pivot in the Treasury’s and IRS’s posture with regard to the ERC more generally. During the first year of the ERC’s debut, it was not uncommon to see language like the following from the Department of Treasury: “The employee retention tax credit is a broad-based refundable tax credit designed to encourage employers to keep employees on their payroll.”9 (Emphasis added). In contrast, when the IRS discusses the ERC today, the context is much less about a credit that is “broad-based” but rather more about a credit that is broadly misused.
Lastly, while the moratorium is in place, we continue to remind businesses that the ERC is a complex claim with specific and exacting requirements. We maintain that businesses should seek out a trusted tax professional—a professional who, as described by the IRS yesterday, “actually understands the complex ERC rules, not a promoter or marketer hustling to get a hefty contingency fee.”10
