In a surprising development, the IRS announced on September 14 that it would stop processing new claims for the employee retention credit (ERC). The ERC is a completely refundable employment tax credit that Congress first enacted as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March of 2020 and later extended and expanded. For applicable quarters (which include all of 2020 and the first three quarters of 2021 for most taxpayers), the ERC provides a benefit for each employee that a business keeps on its payroll where the business either was subject to a COVID-19 shutdown order or had a significant reduction in gross receipts. These rules are complicated and we gave a more comprehensive summary in a recent client alert. Significantly, taxpayers may generally file an ERC claim for quarters ending in 2020 any time before April 15, 2024, and for quarters ending in 2021, any time before April 15, 2025. The IRS to date has received approximately 3.6 million ERC claims.
The "moratorium," as the IRS described the pause, will last at least through December 31, 2023. The IRS's decision follows the IRS's July 26 announcement that it was instituting additional procedures to deal with the "growing fraud risk" relating to the ERC, and promising an increase in both audit and criminal investigation work on ERC claims, on both taxpayers filing claims and "promoters."
Commissioner Werfel said that the IRS now has more than 600,000 open ERC claims, almost all of which have been filed in the third quarter of the year (the July 26 announcement mentioned above had indicated that the IRS had cleared the backlog of claims). Commissioner Werfel indicated that the IRS would release guidance allowing taxpayers with pending claims the chance to withdraw them. In theory, this would prevent the application of underpayment penalties, which apply to ERC refund claims under regulations finalized in July. A settlement program is also planned, which would apply to taxpayers that already received ERC payments that they now believe are improper (again, potentially avoiding penalties, though details are not yet clear). In the case of both programs, the IRS notes that "[t]hose who have willfully filed fraudulent claims or conspired to do so should be aware, however, that withdrawing a fraudulent claim will not exempt them from potential criminal investigation and prosecution."
The moratorium does not substantively change the law applicable to the ERC. The IRS says that it will continue to process already-filed claims "but at a greatly reduced speed due to the complex nature of these filings and the need to protect businesses from being improperly paid." Thus, technically, the moratorium only truly applies to claims that are filed after September 14. With respect to those claims, the IRS urges taxpayers "to carefully review the ERC guidelines during the processing moratorium period. The IRS urges businesses to talk to a trusted tax professional – not a tax promoter or marketing firm looking to make money generating applications that takes a big chunk out of the ERC claim."
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