IRS Employee Retention Credit Update: What Your Company Needs to Know

The IRS continues to crack down on incorrect and fraudulent Employee Retention Credit claims with a series of updates that specifically deal with fraud prevention, new legislation, deadlines, and processing times for current ERC claims.

The ERC is Placed on the “Dirty Dozen” List

What exactly is the Employee Retention Tax Credit? The ERC is a tax credit for businesses that was created to help incentivize and reward employers for retaining their employees during the effects of the COVID-19 pandemic. Employers can claim this credit for each quarter that they retained and paid their employees from 2020 to 2021. 

In 2023, the ERC was placed on the “Dirty Dozen” list by the IRS. The Dirty Dozen list compiles the absolute worst of the worst tax scams. Since the beginning of the ERC, there have been countless scams and tax frauds surrounding it. By placing it on the Dirty Dozen list, the IRS is hoping to raise awareness and put a focus on audit efforts to identify fraudulent claims. 

Several third-party promoters have conned businesses into falsely claiming the ERC tax credit, despite the promoters being mindful of their ineligibility status. These third parties would then receive a percentage or a portion of the tax credit and be exempt from having to repay any of the fraudulent ERC claims. However, with these new ERC guidelines and new legislation, the IRS is attempting to go after these third-party promoters and penalize them.

New ERC Legislation

The Tax Relief for American Families and Workers Act of 2024 (the "Act") has already passed the House of Representatives and has been advanced to the Senate. The provisions in the Act include an accelerated deadline for businesses to file new ERC claims.

The current deadlines to file ERC claims are April 15, 2024, for the 2020 tax year, and April 15, 2025, for the 2021 tax year. But under the Act, new ERC claims are prohibited from being filed after January 31, 2024. Meaning that any claims that were filed before February 1, 2024, will be limited. However, this date is still subject to change with the proposed bill. 

This bill contains three important provisions that you should be aware of:

1. A higher penalty will apply to ERC promoters who aid and encourage understatement of tax liabilities, which includes third-party promoters who promoted ERC scams, exaggerated ERC benefits, misrepresented eligibility criteria, or overstated potential fraudulent tax savings. This new guideline aims to prevent ERC fraud and penalize ERC scammers.
2. Increase the penalty for failing to comply with the ERC requirements for tax return preparers. Meaning, if tax preparers didn’t do their due diligence and research before sending in an ineligible claim, they will now face high penalties.
3. Incorporation of tools that allow the IRS to pursue improper claims that have already been filed, such as extending assessment statutes of limitations. The IRS is hoping that by extending assessment times, they will be able to audit more false claims. 

Essentially, this bill is focused on going after businesses and the ERC promoters who are suspected of ERC fraud and scammers.

ERC Deadlines

In September 2023, the IRS enacted a moratorium, or suspension, on the processing of all new ERC claims until December 31, 2023. The purpose of this suspension was because of the major increase in ERC scams that the IRS was seeing. However, this moratorium has now been extended indefinitely.

If you filed your ERC claim prior to September 14, 2023, then your claim is still being processed; however, due to the extreme volume of ERC claims, there is a major delay on all claims and claim updates. While the IRS is still working on your claims, you should expect a very delayed timeline on all ERC claims prior to this date.

Due to the high volume of ERC claims that the IRS is receiving, the IRS has announced that processing times are delayed and may take between 90 and 180 days for you to receive an update on your claim.

ERC Claim Amendments

So, what if you filed an ERC claim and received a tax credit for your business, which you now realize you were ineligible for? Don’t worry, if you claimed the Employee Retention Tax Credit inaccurately, there are ways to amend your claim without being subject to fines or legal repercussions. 

If you have filed for the ERC claim and realized that you don't meet the qualifications, then you need to take steps to amend your claim and reverse it. 

If you have filed for the ERC claim and have not received your tax credit yet, then you can get in touch with the IRS, and they will walk you through how to withdraw it and send in an amendment, essentially canceling your ERC claim.

Or, if you filed for the ERC claim inaccurately and have already received your tax credit, then you will have to send your Employee Retention Credit check back to the IRS. If you have received the ERC payment and have already spent it, then you may have to pay back the ERC credit out of pocket.

ERC Next Steps

What are the most important things to keep in mind with your ERC claim moving forward? In light of the IRS's continued focus on enforcing improper ERC claims, there are a few aspects that companies should consider moving forward.

First of all, one of the most important things for your company to do is go over your ERC claim again to absolutely ensure eligibility. If you file an ERC claim erroneously and improperly, you may be required to pay back not just the ERC amount, but additional fines and accuracy-related penalties. In some cases, taxpayers may also face legal repercussions, including criminal charges.

If you have gone over your claim and realized that your ERC claim may not be valid, it's crucial that you take immediate steps and get in touch with the IRS to rectify or reverse your Employee Retention Credit claim. 

The IRS’s guidance and regulations regarding the Employee Tax Credit are frequently updated and revised. If you have filed an ERC claim, it's important to stay up-to-date on the regulations and guidelines surrounding it, including the latest legislation in Congress regarding ERC claims and the IRS’s enforcement policies.