IRS imposes moratorium on ERC processing amid fraud concerns

ARTICLE | September 18, 2023

The Internal Revenue Service (IRS) has announced a halt in the processing of new claims for the Employee Retention Credit (ERC), a relief program designed to support small businesses during the COVID-19 pandemic. The pause comes amid rising concerns about improper claims and scams, which pose a significant risk to both businesses and the tax system.

The ERC, a refundable tax credit intended for businesses that continued to pay their employees during the fallout from the pandemic, has attracted the attention of unscrupulous actors. An influx of aggressive promoters promising businesses that they qualify for this complex tax break has led to a surge of questionable claims, putting businesses at financial risk and clogging the tax agency’s processing system.

IRS Commissioner Danny Werfel has called for an immediate moratorium on processing new ERC claims, beginning on September 14, 2023, and extending through at least December 31, 2023. The moratorium was put in place following growing concerns within the tax agency, the tax professionals community, and even media reports highlighting that a substantial proportion of new claims are ineligible.

The IRS will continue to process previously filed ERC claims received before the moratorium. However, due to the increased scrutiny for compliance concerns, including intensified audit work and criminal investigations, the processing times will be longer. Initially, the agency aimed to process these claims within 90 days, but with the enhanced compliance review, the processing time could stretch to 180 days or more, particularly for claims that require further review or audit.

Since its inception, the ERC program has received approximately 3.6 million claims. More than 600,000 claims remain open, with most received in the past 90 days. The IRS’s criminal investigation division has initiated 252 investigations involving more than $2.8 billion of potentially fraudulent ERC claims. Of these, 15 investigations have resulted in federal charges, and six have led to convictions.

The IRS is urging businesses to exercise caution and consult a trusted tax professional before applying for the ERC. With aggressive promoters often taking a significant percentage of the ERC refund as their fee, businesses that receive ERC payments improperly may find themselves facing the daunting prospect of having to pay back not only the credit but also penalties and interest.

The IRS is actively developing new initiatives to aid businesses that fell victim to these aggressive promoters. These initiatives include a settlement program for repayments for those who received an improper ERC payment. More details on this program will be available this fall.

In addition, the IRS is finalizing a special withdrawal option for those who have filed an ERC claim but the claim has not been processed. This option will allow taxpayers, many of whom are small businesses misled by promoters, to avoid potential repayment issues and paying promoters contingency fees.

As part of their wider compliance effort, the IRS is collaborating with the Justice Department to address fraud in the ERC program and take action against promoters who have ignored the rules and pushed businesses to apply.

As the IRS continues to implement additional measures to protect businesses and the tax system, businesses are advised to review the IRS guidelines on ERC eligibility, seek advice from trusted tax professionals, and exercise caution when dealing with promoters promising easy access to the ERC. Contact our trusted tax professionals today if you would like to discuss your businesses’ needs.