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The Employee Retention Credit (ERC) was a refundable tax credit developed during the COVID-19 pandemic to aid businesses and tax-exempt organizations that continued paying employees if their operations were fully or partially suspended due to a government order, they had the required gross receipts decline, or they were a recovery startup business in the third or fourth quarters of 2021. The IRS issued notices and FAQs to explain the ERC rules after repeated clarifications to qualifying requirements.
As you may have heard in the news, aggressive ERC solicitors falsely and misleadingly advertised to the public the requirements for eligibility, particularly the full or partial suspension requirement for the ERC. This caused the IRS to become concerned that fraudulent claims might have been made and that taxpayers might have been exploited.
Moratorium Program
One of the IRS's most recent initiatives to combat "fraudulent ERC claims" is this program.
IRS declared an ERC moratorium on September 14, 2023, which would prevent them from processing newly filed ERC claims until at least December 31, 2023. As of right now, the moratorium remains in effect, and the new expiration date has not yet been published.
- Where applicable, payments on previously submitted ERC claims will continue during the moratorium; however, taxpayers may be required to submit additional documentation to confirm the legitimacy of their claims.
- The IRS states that if a claim needs additional investigation or auditing, the typical processing period for ERC claims will increase to 180 days or longer. (The IRS reports that thousands of ERC claims have already been marked for audit, and thousands of letters of disallowance have been issued by the agency.)
Voluntary Disclosure Program (VDP)
After announcing the moratorium, the IRS introduced the VDP, which provides employers the chance to repay their ERC claim if they now believe they are not eligible for the credit. There are several advantages to utilizing the program, including:
- The interest you received on your ERC refund is not required to be repaid.
- You don’t have to amend income tax returns to reduce wage expense.
- There is no income tax on the 20% reduction.
- IRS will not charge penalties or interest on the claimed ERC amount if you pay it in full (claimed ERC minus 20%) by the time you return your signed closing agreement to IRS
- For any tax period(s) handled in accordance with ERC-VDP guidelines, the IRS will not review ERC on your employment tax return.
By March 22, 2024, eligible taxpayers must submit an electronic application for the program. The third party must submit the application if the taxpayer claimed the ERC using that third party's employer identification number. This new program is described in detail in IRS Announcement 2024-03.
For taxpayers who have filed a claim for the ERC but have not yet received it (or who have received a check but have not cashed or deposited it), a different withdrawal process is available. Withdrawn claims will be handled as though they were never submitted. Penalties and interest will not be imposed by the IRS.
Next Action Steps
In light of the increased level of IRS attention, we strongly advise clients to evaluate or reevaluate their claims. If a third-party provider was involved in the ERC claims, your LGT ERC team would be happy to review them when needed. With the assistance of your third-party provider, we can help you evaluate potential shortcomings to withstand IRS reviews.
After assessing potential risks to the claim, we can then help you determine the following actions:
- Keep the claim as filed
- Determine whether the documentation provided by the third-party can withstand IRS strict reviews and suggest where additional support is needed
- Determine if the money should be returned
- If the claim has not yet been paid, discuss the merits of withdrawing the claim
- If the claim was paid, discuss the merits of entering the ERC Voluntary Disclosure Program available through March 22, 2024, which provides you the ability to keep 20% and repay 80% with no penalties or interest; cooperate with the IRS in identifying and potentially testifying against the third-party provider; as well as enter into a closing agreement
These programs represent significant ERC developments. Knowing this now helps you assess your situation and apply by the deadline. We will actively watch ERC changes and how it might impact your business. In the meantime, feel free to contact our LGT team with questions.
Have questions? We would love to help!
If you have any questions or would like additional information about anything mentioned, please comment below or email us at askus@lgt-cpa.com.
