ERC Warnings Business Owners Can't Brush Off
The landscape surrounding Employee Retention Credit (ERC) claims is rapidly changing, and businesses need to stay informed. On June 20, 2024, the Internal Revenue Service (IRS) announced a crackdown on ERC claims, which will affect many businesses that have relied on this credit during the COVID-19 pandemic.
The IRS has stated that it will deny tens of thousands of high-risk ERC claims, potentially worth billions of dollars. This decision follows an in-depth review process that identified between 10 and 20 percent of claims as high risk, and these claims will be denied outright. An additional 60 to 70 percent of claims flagged as risky will undergo further examination.
Additionally, the IRS has implemented a processing moratorium on new claims submitted after September 14, 2023. While the IRS is still processing low-risk ERC claims received before that date, the processing pace has slowed considerably. The IRS is currently handling only about 1,000 to 2,000 returns per week, with a backlog of nearly 1.5 million filings. Businesses that are waiting for their legitimate claims to be processed may begin receiving payments later this summer.
This update underscores the importance of ensuring that any ERC claims previously filed meet all eligibility requirements and are well-documented. IRS Commissioner Danny Werfel has advised businesses to use this time to review the IRS guidelines on their website, consult with legitimate tax professionals, and consider using the IRS withdrawal program if there are issues with their claim. The withdrawal program allows businesses to withdraw unprocessed claims without penalties or interest, preventing future compliance issues. If your business has not yet received its ERC payment, or if you’ve received a check but have not cashed or deposited it, you can return the check and withdraw your claim.
Businesses should expect increased IRS scrutiny of ERC claims and may be subject to audits. To ensure compliance and avoid problems, businesses should consult a tax professional with experience in ERC claims. Working with a knowledgeable tax advisor can help protect you from promoters and unethical tax preparers who might try to take advantage of this situation. Be on the lookout for warning signs that you may have been targeted by an ERC promoter:
Percentage-Based Fees
Promoters who charge fees based on the size of your ERC refund are violating IRS regulations. The IRS prohibits this type of payment arrangement under Circular 230.
Indemnification Clauses in Agreements
Some ERC promoters include disclaimers in their contracts to protect themselves from liability. For example, a clause stating, “ERC Preparer does not provide tax advice or CPA services and is not responsible for the preparation of tax returns,” could be a red flag if the promoter was involved in helping you file your ERC claim.
Unrealistic Claims of Quick Eligibility Determination
Statements like “Determine your ERC eligibility in minutes” are not realistic. ERC claims require careful analysis, and determining eligibility often takes weeks or months to complete properly.
Refusal to Sign Tax Returns
If an ERC preparer refuses to sign the tax return or provide identifying information, they may be a “ghost preparer,” a term the IRS uses for unqualified preparers who don’t comply with tax rules. Businesses should always require transparency from tax professionals and ensure they sign the return.
Failure to Explain Eligibility Requirements
If a promoter fails to explain eligibility criteria, limitations on wages, or how ERC interacts with the Paycheck Protection Program (PPP), they might be providing incorrect or misleading advice.
Supply Chain Disruptions
Some promoters may incorrectly claim that businesses are eligible for ERC due to supply chain disruptions. This is only true in rare cases, and businesses should fully understand the eligibility requirements to avoid mistakes.
Unsolicited Calls and Advertisements
Be cautious of unsolicited offers to help with ERC claims, especially if the process is promised to be “easy” or “quick.” ERC claims require thorough documentation and careful evaluation; they are not simple applications.