The IRS and the Employee Retention Credit Freeze: What Your Business Needs to Know
On September 14, the Internal Revenue Service announced that it was pausing applications for the Employee Retention Credit, a tax credit that businesses that had employees and were also affected by the pandemic, after it cost the government billions of dollars in fraudulent payments. The agency is concerned that many small businesses were targeted by scams from “tax mills” that encouraged businesses to apply for the credit although they were not eligible.
As a result, the IRS is now slowing their processing of applications have already been submitted, and will stop processing any new claims until the end of the year. Keep reading to learn more about what the Employee Retention Credit is, Why the IRS is freezing new applications, and what you should do if your business applied for the ERC.
What is the Employee Retention Credit?
The Employee Retention Credit is a refundable tax credit for business and tax-exempt organizations who had employees and were affected by the COVID-19 pandemic. This credit allowed businesses to claim up to 50% of qualifying wages paid between March 13 of 2020 and before December 31 of 2021. The eligibility requirements are somewhat complex, but generally only apply to businesses that paid wages despite shutting down or decreasing operations.
According to the Department of US Treasury, business are eligible to apply for the ERC if:
the employer’s business is fully or partially suspended by government order due to COVID-19 during the calendar quarter, or
the employer’s gross receipts are below 50% of the comparable quarter in 2019. Once the employer’s gross receipts go 80% of a comparable quarter in 2019 they no longer qualify at the end of that quarter.
The credit was primarily designed for businesses who paid employees who did not work during the calendar quarter, but is also available to businesses with 100 or fewer employees, even if their employees continued to work.
Why is the IRC freezing new ERC applications?
Unfortunately, some “tax mills” — accounting firms and other companies — found an opportunity to exploit the Employee Retention Credit by encouraging businesses to submit applications although they were not eligible to receive the credit. In exchange, these companies would take a commission for submitting the applications or a percentage of the refund. Many of these companies lured businesses to submit by stating that submissions are “risk free,” but businesses who improperly received payment from the IRS after submitting and application ar at risk of audit and criminal investigation — as well as being required to pay the credit back with penalties and interest.
Faulty applications for the ERC have resulted in nearly $3 billion in potentially fraudulent claims, and the IRS has initiated over 250 criminal investigations. Additionally the IRS has referred thousands of ERC cases for audit.
As a result the iRS has decided to slow down its processing of applications and will not begin processing new applications. Although businesses can continue to submit applications, the earliest they can expect the IRS to look at it is at the beginning of 2024.
What if my business applied for the Employee Retention Credit?
If you have already applied for the Employment Retention Credit and you believe that you may have been misled to apply or submitted an application in error, consider reviewing the program guidelines with a trusted tax professional and withdrawing the claim if you find that it does not meet the criteria.
If you have already received a refund for your ERC application and you believe it may be in error, the IRS will be providing information on a settlement program in the fall that will allow business to repay ERC claims. This program will allow businesses to avoid penalties and future compliance action.
Takeaways
Businesses have become easy targets for tax mills who have encouraged them to apply for the Employment Retention Credit, although many of them were not eligible. This increase in applications caused the IRS to issue a moratorium on processing of current applications and the agency will not process new applications until 2024.
If your business applied for the Employee Retention Credit and you need help determining if your application was eligible, contact the experts at Coveted Financial Services and we can work with you on the best possible steps moving forward.