IRS Moratorium on ERC Credits: What Accounting Professionals Need to Know

The Employee Retention Credit (ERC), a pivotal pandemic-era relief measure designed to aid businesses, has come under the microscope. The Internal Revenue Service (IRS) has decided to halt the processing of new ERC claims until at least December 31, 2023. This decision is not merely bureaucratic red tape; it's a calculated move to stem a flood of questionable claims that jeopardize the integrity of the tax system and put honest businesses at risk. For accountants and tax professionals, understanding the nuances of this change is crucial for guiding clients through this evolving landscape.

Why the Moratorium?

The IRS is alarmed by the increasing number of illegitimate claims that are putting businesses in precarious financial situations. A nexus of aggressive marketing, lax eligibility checks, and predatory tactics have exacerbated this issue. IRS Commissioner Danny Werfel points out that they could "no longer tolerate growing evidence of questionable claims pouring in."

What Does This Mean for Existing Claims?

If your clients have already filed an ERC claim, it's going to be a long haul. The IRS is not halting the processing of existing claims but warns that scrutiny will be heightened. Previously, the standard processing goal for these claims was 90 days. However, businesses should now brace for a lengthier 180-day window, which could extend further if the claim comes under review or audit.

The Caveats for Filing New Claims

For businesses contemplating filing a new claim, Werfel advises consulting with a tax professional who comprehends the ERC's complexity rather than being lured by promoters promising risk-free submissions. In fact, with the IRS intensifying its audits and criminal investigations, the term "risk-free" is a misnomer. Promoters may collect contingency fees of up to 25% of the ERC refund, leaving businesses in a worse financial position if the claim is subsequently disallowed.

Steps for Businesses with Pending or Improper Claims

The IRS is developing a settlement program for businesses that find themselves stuck with improper ERC payments. Moreover, a special withdrawal option is in the works for businesses whose claims haven't yet been processed. Withdrawing a claim will protect them from potential penalties and interest payments, although it will not exempt them from criminal investigation if the claim is fraudulent.

Keep an Eye on Red Flags

The IRS has generated a list of warning signs to look out for when it comes to aggressive marketing of ERC claims. These red flags can help you and your clients identify potentially harmful schemes.

Professional Advice is Key

In their press release, the tax agency heavily emphasizes that businesses should consult with trusted tax professionals to review their specific situations and eligibility. The criteria for ERC eligibility involve precise conditions like a suspension of operations due to COVID-19 or a significant decline in gross receipts. 

Given the IRS's pivot toward scrutinizing ERC claims, accounting professionals have a critical role to play. It's imperative to assess each client's unique situation, guide them through these regulatory shifts, and potentially help them recalibrate their financial strategies. With financial consequences and legal ramifications at stake, businesses are going to lean more than ever on your expertise. 

For more details, you can visit IRS.gov/erc to stay on top of ongoing developments.