IRS halts employee retention credit processing

Executive summary:

ERC moratorium

On Sept. 14, the IRS announced it will stop processing any new employee retention credit (ERC) claims filed until at least the end of 2023.

Numerous businesses have either:

1. filed and received refunds,
2. filed but not yet had their claims processed, or
3. begun the process of calculating credits with the anticipation of filing before the statute of limitations ends allowing the ERC to be claimed for 2020 or 2021.

Depending upon which of these scenarios an entity may be in, the announcement will have various implications as laid out in the release.

IRS halts employee retention credit processing

Additional IRS guidance

This action follows prior announcements where the IRS has indicated it was aware of significant fraud risk in the ERC market with numerous promoters helping businesses who may not be eligible file for large credits and earning a contingent fee on the credit amounts. The IRS also announced that hundreds of criminal cases are being worked on with respect to ERC filings, and thousands of ERC claims have been referred for audit.

In addition to summarizing the implications for entities in various scenarios, the IRS sent a letter to Congress asking for help combatting such fraud in the future, as well as publishing yet another release with red flags that may indicate aggressive promoters, an updated eligibility summary and new question and answer guide. It is important to note that none of this information provides new rules for applying the ERC, rather it provides a summary and reminders of previous guidance already issued by the IRS that the IRS believes many filers have not heeded.

Throughout the materials released, the IRS encourages employers to use trusted tax professionals for ERC guidance. Many entities will find themselves in a position of needing to reach out to a tax advisor with ERC experience to help determine their best path forward. In many cases, that path will not be clear until the IRS releases additional guidance for entities who have already filed an ERC claim who want to either:

1. pay it back or,
2. withdraw an unprocessed claim before the IRS reviews it.

Many entities are eligible for the ERC that have not yet filed a claim, and the statute of limitations is still open until April 15, 2024, for 2020 credits and April 15, 2025, for 2021 credits. These entities may find the IRS announcement discouraging as not all claims being filed now are fraudulent, rather many entities simply did not know until recently they were eligible or have not had the capacity to pull together the information to file the claims yet. The current announcement indicates the moratorium is only temporary so we would expect entities in this situation to still be able to file claims as the release does not state that you cannot file, but only that the IRS will not process them until further notice. We recommend you work with a tax professional to determine the best path forward in this situation.

This article will be updated as future guidance is available.