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San Mateo, CA: A somewhat controversial tax credit, the Employee Retention Credit (ERC), was put on a "timeout" today by the IRS. No new ERC claims will be processed from now until the end of the year .
I previously blogged an article on ERC fraud and the potential that employers were being "duped" by aggressive marketing companies that promised a windfall of "up to $26,000 per employee in tax credits" from the IRS.
Yes, this was a legitimate program offered during the pandemic as a relief for business who retained employees on their payroll in spite of being severely affected by pandemic factors. Passed as part of the CARES Act ( Coronavirus Aid, Relief, and Economic Security ) of 2020, the ERC allows qualified employers to amend their payroll tax returns and take a credit for certain payroll takes paid during the applicable period. The IRS has received approximately 3.6 million ERC claims over the course of the program.
The program, however, was not an automatic "handout". There was certain criteria which had to be met in order for the employer to qualify. These criteria included a documented percentage drop in quarterly revenue, closure of a business due to a government COVID health order, and other factors. The ERC was not available to individual taxpayers.
Enter the Fraudsters!
The ERC was seized upon by many an unscrupulous operator as a way to "get their cut". May fraudsters flooded the airwaves (TV and radio) with promises of thousands of dollars in ERC money for employers. The issue was that MANY of the employers that these fraudsters enrolled in their scheme were NOT QUALIFIED and NOT ENTITLED to the ERC credit. The credit was paid and the fraudsters got their percentage of ill-gotten gains.
The sheer number of applications overwhelmed the IRS and has led to today's decision to stop processing new ERC claims. Presumably, this gives the IRS an opportunity to turn its sights BACK on those ERC benefits that were already paid out that should not have been. The IRS announced this "look back" by stating they were shifting their focus to review paid claims for compliance concerns, i ncluding intensifying audit work and criminal investigations on promoters and businesses filing dubious ERC claims.
The IRS is also developing new initiatives to help businesses who found themselves victims of aggressive promoters. This includes a settlement program for repayments for those who received an improper ERC payment--more details will follow this Fall.
If you are thinking this is another example of closing the barn door after the horse has bolted, you may be right. Time will tell.
Kevin Rego
650.933.5222
