The IRS has taken a significant step in its efforts to safeguard the integrity of the tax system by temporarily halting the acceptance of claims for a pandemic-era tax credit known as the Employee Retention Credit (ERC). This suspension will remain in effect until 2024, a decision stemming from the mounting concerns surrounding the surge in potentially fraudulent applications.
The ERC was initially conceived as a lifeline for small businesses grappling with the economic challenges of the COVID-19 pandemic. Its primary purpose was to provide financial assistance to these businesses, enabling them to continue paying their employees, even if they had to suspend or scale down their operations. While the credit officially concluded on October 1, 2021, a provision allowed businesses to retroactively apply for it by filing an amended payroll tax return.
Challenges and Concerns Surrounding the IRS ERC Program
Unfortunately, this well-intentioned program, with its intricate eligibility criteria, inadvertently attracted unscrupulous actors seeking to exploit the system. A growing number of dubious claims emerged from small businesses that may have been unwittingly drawn into fraudulent activities. Some businesses fell prey to scammers offering to assist with ERC applications for a fee, even when their eligibility was questionable. Importantly, the ERC was never intended for individual taxpayers but rather for businesses.
IRS Commissioner Danny Werfel expressed deep concern about the escalating prevalence of honest small business owners being duped by unscrupulous individuals. He stated, “The IRS is increasingly alarmed about honest small business owners being scammed by unscrupulous actors, and we could no longer tolerate growing evidence of questionable claims pouring in. The further we get from the pandemic, the further we see the good intentions of this important program abused.”
Throughout the duration of the program, the IRS received a staggering 3.6 million claims for the ERC. The agency began intensifying its scrutiny of these claims starting in July. Notably, hundreds of criminal cases have been initiated, and thousands of ERC claims have been flagged for audit, underscoring the gravity of the situation.
RS Measures to Address ERC Program Challenges and Fraud Concerns
In light of these developments, the IRS is instituting several changes to address the situation. Claimants who have already submitted their ERC applications should anticipate longer processing times, with the waiting period extended from 90 to 180 days. Furthermore, if a claim requires further review or audit, the processing time may be even longer. Additionally, the IRS is introducing a mechanism for small businesses to withdraw their claims if they believe they no longer meet the eligibility criteria. As of now, approximately 600,000 claims remain pending.
The pandemic prompted the government to implement a range of programs aimed at supporting small businesses, but unfortunately, these initiatives have also become targets for fraudsters. It is suspected that as much as $200 billion may have been misappropriated from two other pandemic-era programs—the Paycheck Protection Program (PPP) and the COVID-19 Economic Injury Disaster Loan (EIDL) program.
For small business owners who are uncertain about their eligibility for the ERC, the IRS has provided resources on its website, including an eligibility checklist. These resources can serve as valuable tools for businesses seeking to ensure they meet the necessary requirements before pursuing the credit.
In summary, the IRS’s decision to pause the acceptance of ERC claims until 2024 is a proactive measure aimed at combating fraudulent activities and protecting the integrity of the tax system. Small businesses are encouraged to exercise due diligence and access the resources available on the IRS website to determine their eligibility for the credit. As the IRS continues its efforts to scrutinize claims and deter fraudulent activities, it remains committed to supporting honest businesses during these challenging times.