Tax Alert: The IRS Will Stop Processing ERC Claims Temporarily, Amid Fraud Concerns

September 18, 2023

By: Scott Shapiro, ERC Partner

At a glance:

The main takeaway: The IRS just released a news update detailing key changes to the Employee Retention Credit (ERC) program, which was started and grew in popularity as a result of the COVID-19 pandemic.
Impact on your business: Notably, the release states that the IRS will halt all new ERC claim processing temporarily, due to what they view as the massive rise in fraudulent claims processed in recent months. Refunds based on claims already received by the Service will be processed, albeit at a slower rate to allow for increased scrutiny.
Next steps: The IRS recommends that all businesses should partner with a qualified, reputable CPA firm and accounting team to navigate ERC claims and potential audits.

The full story:

On September 14, 2023, the IRS issued a news release with key updates on the Employee Retention Credit (ERC), the pandemic-era tax benefit that rewarded employers for retaining employees if their operations were partly or fully suspended due to COVID-19. The IRS’s news release has been picked up by major media outlets such as The Wall Street Journal, The Washington Post and CNN, which have all issued their own stories and takes on the issue.

What are the contents of the IRS’s news release about the ERC?

New ERC claim processing will halt — for now — due to “rising concerns about a flood of improper ERC claims,” according to the IRS. As a result, the IRS has announced a moratorium on processing new claims through the end of 2023, at least.

In its release, the IRS revealed that many recent ERC claims are coming from businesses that are actually not eligible for the ERC. Unfortunately, scammers have taken advantage of small businesses, claiming they can help them obtain ERC benefits when, in fact, they do not meet the criteria to receive them.

The release comes on the heels of the IRS’s warnings to taxpayers about using aggressive promoters’ and scammers’ ERC services. These scammers (often called “credit mills”) financially benefit from filing ERC refund claims for ineligible businesses.

What about ERC claims that have already been filed?

The release notes that payouts for filed claims will continue during the moratorium, albeit at a slower pace; certain refund requests will also be subject to increased scrutiny by the IRS.

When filing for the ERC, the IRS recommends that “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.”

The IRS is also developing new initiatives for businesses that believe they may be ineligible for the ERC and have either received refunds or have refund requests in process. It is likely that this relief will be a repayment of funds without penalty, but the IRS has not announced those details yet.

Overall, businesses have filed a total of $3.6 million ERC claims during the course of the program, with 600,000 cases still pending. Media outlets have reported that the IRS is receiving approximately 50,000 new filings per week, with over $230 billion in paid-out claims to date (versus the IRS’s anticipated ERC payout, which was $150 billion).

The bottom line

Since the beginning of the ERC program, legislators and the IRS have not provided clear guidance on the rules surrounding the eligibility process, which may have opened the door to abuse in the system. Simply turn on your TV tonight and you will likely see at least one advertisement for services promoting “easy-money ERC refunds.”

The IRS likely will be aggressive in its ERC claim audits, and defending even the strongest cases will be a challenge. Business owners need to be proactive and take action to find a knowledgeable, credentialed and experienced tax advisory team to help them chart the waters ahead.

How Aprio can help

Aprio was at the forefront of helping clients navigate pandemic-era programs like the ERC, and we stand ready to help business owners dealing with this news from the IRS. Since the inception of the ERC program, Aprio has prepared approximately 4,000 refund claims for employers. Our standards track to the eligibility requirements, and our approach has been conservative in approving business owners for the credit. That means we do turn down many potential ERC clients because we do not believe they have a path to eligibility.

With that being said, we know that many innocent business owners will be caught in the ERC web — which is why we have developed a strong team to address ERC audits and assist other taxpayers under audit. The IRS’s actions are clearly aimed at bad actors in the ERC environment, as the release refers consistently to trusting CPAs and other professional advisors regarding the program.

If you need a trusted CPA and accounting team to help you manage ERC audits, schedule a consultation with Aprio today.