ERC Tax Credit: What Does the New IRS Update Mean?

Apparently, the whole country, including the House Ways and Means Committee, wants answers regarding the IRS’s moratorium announcement. The committee published a letter to the IRS Commissioner Daniel Werfel calling out the actions of the IRS in regard to how it has handled the ERC processing and what it is going to do going forward to fix the issues. 

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The COVID-19 pandemic has brought unprecedented challenges to businesses worldwide. Lockdowns, declining revenue, and uncertainty compelled the U.S. Government to introduce various relief measures, including the Employee Retention Credit (ERC), designed to encourage employers to keep paying their employees (in some cases even if they were not working).

The ERC has been a controversial program. The IRS warns about fraud caused by aggressive advertising from “ERC Mills” and promoters encouraging people to wrongly claim the credit. Of course, as with any expansive government program, there is the potential for fraud. The ERC, like the Paycheck Protection Program (PPP) and many other aspects of COVID-19 era legislation, is no exception.

To counter the rising concerns of fraud in the ERC program, the IRS made a significant announcement on Sept. 14, 2023, including an “…immediate moratorium, beginning today, to run through at least Dec. 31 following growing concerns…” according to IRS Commissioner Danny Werfel. This statement came along with initiating several measures under the banner of “help protect taxpayers.” But just how significant is this announcement and what does it mean to employers?

Many false ideas have been spread about the announcement, the worst being that the ERC was terminated.

Let’s Clarify Everything Regarding the Employee Retention Credit (ERC)

Moratorium on ERC Claims

To get a handle on the program, a moratorium was placed on processing new ERC claims that have not been already submitted until at least January 2024, effective immediately.

It is still being determined whether the IRS considers a claim to be submitted if it is postmarked before that Sept. 14th date or if they need to acknowledge receipt by that date. We also know that a typical ERC claim submission isn’t even acknowledged as received by the IRS for about four months on average. This means that the moratorium doesn’t change the current practice, the IRS is just acknowledging the current protocol to the public.

Extended Processing Times for the ERC

Additionally, the IRS announced that it will extend processing times for existing ERC claims, which will now have a standard processing goal of 180 days (the previous target was 90 days). However, further reviews or audits during the process could prolong this period further.

It’s crucial to highlight that although the former goal was 90 days, the experience of the majority of taxpayers was approximately 180 days. This suggests that this new objective of 180 days might subtly imply to taxpayers that they could potentially encounter nearly a year’s delay before receiving the funds they rightfully deserve.

Additional Documentation

The IRS may request additional documentation from taxpayers to verify legitimate claims, reinforcing compliance.

During the past two years, the IRS has changed its protocol numerous times to require documentation not previously necessary. So again, this is nothing new, just announcing their current process to the public.

Continued Payouts

Payments for existing claims will continue during the moratorium, albeit at a slower pace due to detailed compliance reviews.

Payouts have been inconsistent since the program started. In the past year, they have slowed down even more. Some claims took over two years before the funds were audited and given to the rightful taxpayer.

Enhanced Oversight

Recognizing the potential for fraud, the IRS has allocated additional resources to audit and review ERC claims more thoroughly. The main focus is on risky areas. These areas include businesses that may have claimed credit for paying wages to family members or related parties. More careful examination is meant to discourage false claims.

Outreach and Education

To reduce unintentional errors and misunderstandings, the IRS has made efforts to provide guidance and resources to help businesses understand ERC eligibility, calculations, and reporting requirements.

The IRS has not been effective in communicating and educating in the past. However, clear communication and education are crucial for preventing misuse of aid programs.

Penalties for Fraud

Companies that intentionally give false information or commit fraud to get the ERC may be heavily punished. These penalties can include fines and even potential criminal charges.

As always, penalties aim to serve as a deterrent to those considering fraudulent claims.

Ongoing Fraud Investigations

The IRS has hundreds of criminal cases in progress, with thousands of ERC claims referred for audit, highlighting the seriousness of combating fraud.

The IRS recommends that taxpayers seek reliable professionals for assistance with the program. It is important to avoid promoters and “ERC Mills” despite their appealing promises.

Considering the IRS doesn’t have the authority to end the law, only Congress can change legislation. The IRS can only change its internal rules, which is what was announced. However, most of these new rules have already been the reality for a while. When comparing the reality of the announcement to the current landscape and taxpayer experience, it seems like much ado about nothing.

Understanding the Employee Retention Credit Program

To understand the program and its concerns about fraud, let’s examine the ERC. We will look into its workings and the genuine concerns regarding potential fraud.

Program Expansion

The Employee Retention Credit (ERC) was set up under the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020, spanning from March 12, 2020, to December 31, 2020. As the pandemic persisted, the ERC was broadened and fine-tuned through further legislative measures, such as the Consolidated Appropriations Act of 2021, the American Rescue Plan Act, and the 2022 Bipartisan Infrastructure Bill. These changes aimed to make the program more accessible and beneficial to businesses by:

• Change the definition of small and large employers.
• Extending the eligibility period, significantly increasing the maximum possible credit.
• Expanding the eligibility criteria to include more businesses.
• Increasing the credit rate, allowing for higher potential benefits.
• Modifying the threshold for the significant decline in gross receipts.

In its final state, here is what we know…

Large Employer Status

The ERC includes a provision to treat Large Employers differently from Small Employers for purposes of determining which wages can be used to calculate the credit, so it is critical to properly identify which category a business falls into:

• In 2020, large employers are those with more than 100 full-time employees. Employers with 100 or fewer employees are considered small.
• In 2021, the definition of a large employer was changed to those with more than 500 full-time employees, while small employers are now those with 500 or fewer full-time employees.
• It is easy for most employers to determine this, but for those on the bubble, there are specific rules that must be observed.

Eligibility Criteria

To qualify for the ERC, businesses must satisfy one of a few eligibility methods, specifically:

• Experiencing either a full or partial suspension of operations due to government orders related to COVID-19. There is an exception to this rule to allow an employer to qualify under a supplier shutdown if certain conditions are met, but not just under the general argument of “supply chain disruptions”, on which the government has provided guidance.
• Suffering a significant decline in gross receipts. The definition in 2020, is a 50% decrease in gross receipts when compared to the same quarter in the previous year. For 2021, the requirement was lowered to a 20% decrease in gross receipts, when compared to the same quarter of 2019.
• If neither of these two criteria is met, and the business began operations after Feb 15, 2020, the employer then qualifies as a Start-Up Recovery business.

Credit Calculation

The ERC offers eligible employers a tax credit for a portion of the wages paid to employees during a defined “qualifying period.” Here’s how the credit calculation works:

• In 2020, eligible employers could claim a credit equal to 50% of qualified wages paid to each employee, up to a maximum of $10,000 per employee for the entire year. Thus, a maximum possible credit of $5,000 per employee for 2020.
• In 2021, the credit rate increased to 70% of qualified wages, and the maximum credit per employee remained at $10,000. However, in 2021, the credit was applied every quarter rather than annually. This means that the maximum possible credit for 2021 is $21,000 per employee.

While initially complex, there is no doubt that the passing of multiple subsequent pieces of legislation has magnified the complexity and provided for many employers, who previously may not have qualified, to be eligible to take advantage of the program when they check into the final rules.

The above explanation is a simplified summary of the provisions, however, the details of each provision…employer size, eligibility rules and respective periods, qualified wages, coordination of competing government programs, etc…result in the need for the assistance of professionals who truly understand the changes and nuances to safely navigate the program.

Now that we have a foundational understanding of the ERC, let’s explore the IRS concerns regarding potential fraud.

Concerns Surrounding Fraud in the ERC Program

The Complexity of Rules and Regulations

The ERC program is notorious for its complexity. The eligibility criteria, large employer definitions, wage calculations, and documentation requirements can be intimidating. The sheer complexity of the program not only increases the likelihood of inadvertent errors but also creates opportunities for intentional manipulation. Businesses may struggle to negotiate the intricate rules, inadvertently making mistakes or, in some cases, deliberately exploiting the program’s intricacies.

Evolving Legislation

The ERC underwent several changes and extensions, introducing new rules and conditions with each iteration. While these changes aimed to enhance the program’s accessibility and benefits, they also raised the potential for errors and discrepancies. Businesses were required to stay informed and updated about these evolving rules, which proved challenging in a legislative landscape that was rapidly shifting.

Lack of Verification Resources

The IRS was tasked with processing an immense volume of ERC claims, making it challenging to thoroughly verify each claim. Many claims and agents’ lack of understanding, along with limited resources, may let fraudulent or wrong claims go unnoticed. The inability to conduct comprehensive verifications due to the program’s scale has been a significant concern.

Overlapping Benefits

Many businesses received multiple forms of pandemic-related financial assistance, for example, the Paycheck Protection Program (PPP) loans, a Shuttered Venue Operators Grant (SVOC), and the ERC. Overlapping benefits can create scenarios where businesses unintentionally or intentionally receive more financial support than they should. When not carefully monitored, this overlap can lead to misuse of the programs, potentially resulting in funds not being allocated where they are most needed.

Whistleblower Reports

Reports have emerged of whistleblowers alleging misuse or abuse of the ERC program by certain employers. These whistleblowers have played a critical role in bringing potential fraud to light. These reports underscore the importance of oversight and monitoring to prevent fraudulent activities and ensure the program benefits those who genuinely require support.

The Future of the Employee Retention Credit

The Employee Retention Credit remains a critical lifeline for businesses, and its integrity must be preserved. Like any monumental government aid program, the ERC has faced challenges in ensuring funds reach deserving businesses. Despite what you may have heard from the media, tax advisors, or friends, the ERC remains in effect and offers eligible employers a substantial financial benefit designed to help them recover from the impact of COVID-19. So, find a knowledgeable professional who can help you navigate the turbulent waters of the ERC, determine if you are eligible and, if so, submit your claim as soon as possible to be in the queue early for when the IRS lifts the moratorium. All the best!

Additional Resources

FAQ About the ERC

Answers to the Most Common ERC Questions

FAQs on Understanding the Employee Retention Credit (ERC) IRS Update

 

The material presented here is educational in nature and is not intended to be, nor should be relied upon, as legal or financial advice. Please consult with an attorney or financial professional for advice.