On September 14, 2023, the IRS issued News Release IR-2023-169, which imposes a moratorium on processing employee Retention Credit (ERC) refund claims, amongst other informational items. Essentially, claims filed after September 14 will not be processed until 2024. Claims filed before that date will continue to be processed but may take up to six months or longer for processing, if subject to review or audit by the IRS.

The News Release notes that many applications currently filed are likely ineligible, mostly due to promoters not following the rules. It also provides escape clauses for those taxpayers who have filed claims they now feel are not warranted. This includes the ability to withdraw a claim; additional guidance on that topic is forthcoming. The IRS is prioritizing this and will be looking closely at all claims — past, present and future.

It is important to note that eligible taxpayers should not be deterred from pursuing a proper ERC claim with a trusted professional.

IRS warns of aggressive employee retention credit claims

The IRS has noticed a growing trend of aggressive ERC claims and has begun issuing notices warning of third parties aggressively promoting the ERC to ineligible persons and businesses. These notices recommend that taxpayers look out for third parties charging hefty upfront fees, or fees contingent on the claim amount, and encourage taxpayers to be wary of targeted schemes or solicitations promising tax savings that are too good to be true. In a recent Tax Tip, the IRS warned of unsolicited calls or advertisements mentioning an “easy application process”; statements that the promoter can determine ERC eligibility within minutes or before any discussion of the employer’s tax situation; promoters telling businesses to claim the ERC because they have nothing to lose; and promoters telling businesses to ignore the advice of their trusted tax professional.

Due to the pervasiveness of these aggressive marketing schemes, the IRS has stepped up enforcement action – having trained auditors examining these claims and being on the lookout for promoters of fraudulent claims of the credit. The IRS has also added these aggressive ERC claims to its “Dirty Dozen” list of tax scams for 2023 – which notifies taxpayers of a variety of schemes or scams prevalent across the tax landscape. In addition, the IRS recently modified its Frequently Asked Questions regarding the ERC to address specific questions surrounding taxpayer eligibility, definitions of shutdown orders, the requirement to amend income tax returns, required record-keeping and others. Many taxpayers’ questions remained unanswered, leaving several issues unresolved.

Consequences of filing a fraudulent ERC claim

For those who have filed a fraudulent ERC claim, there may be consequences from the IRS. If deemed fraudulent, the initial ERC claim will be disallowed and will have related penalties and interest on the underpaid employment taxes as a result. A recent Forbes article describes the arrest of an individual who is deemed to have fraudulently prepared ERC refund claims for his own businesses and those of his clients, totaling $124M.

In addition to the above repercussions, a “whipsaw” effect may be in play. The IRS typically has a three-year statute of limitations to audit income tax returns. However, in some situations, the IRS may have a five-year statute of limitations on payroll tax returns claiming the ERC, which may result in otherwise available tax wage deductions being lost if they lie within that two-year period where the statutes of limitations do not overlap. Final tax regulations were issued by the IRS on July 24, 2023, which provide administrative means and leeway to the IRS in efficiently recovering erroneous refund amounts, including those from the ERC.

The IRS has contacted you regarding your ERC claim – Now what?

If you believe you have erroneously filed a fraudulent ERC claim, and that claim is now under scrutiny by the IRS, or you need help in determining the validity of your ERC claims filed – BPM has a specialized ERC practice team and an audit defense team that can provide a variety of services:

1. Experience and knowledge: BPM has specialists with extensive knowledge of tax laws, regulations and guidelines related to the ERC. We understand the specific requirements for eligibility, calculation and documentation of the credit. They can help identify any errors or discrepancies in the claim and develop an effective defense strategy.
2. Claim review: BPM will thoroughly review the initial claim to assess its accuracy and compliance with the ERC requirements. We will examine the documentation, payroll records, financial statements and other relevant information to identify any potential issues or weaknesses in the claim.
3. Compliance evaluation: If the employee retention credit claim is facing scrutiny, BPM will assess whether the claim complies with the applicable regulations and guidelines. We will review the company’s eligibility criteria, such as the impact of COVID-19 on operations, suspension orders, reduction in gross receipts and employee count requirements.
4. Documentation and record-keeping: A crucial aspect of defending an ERC claim is having proper documentation and record-keeping. BPM will ensure that all necessary documents, such as payroll records, financial statements, tax returns and other supporting documentation, are organized and readily available. If needed, we will help gather additional evidence to support the claim and strengthen the defense.
5. Communication with authorities: If the IRS has raised concerns or issued an audit notice regarding the ERC claim, BPM will act as the intermediary. We will handle all communications, inquiries and requests from the authorities on behalf of the company, ensuring that responses are accurate, timely and comprehensive.
6. Audit support: In the event of an audit or examination of the ERC claim, BPM will provide representation and support during the process. We will liaise with the auditors, respond to inquiries, provide necessary documentation and present the case effectively to defend the claim. Our knowledge and experience in dealing with tax audits will be highly valuable in navigating the process.
7. Appeals process: If the initial claim is denied or the company disagrees with the audit findings, BPM can assist in preparing and filing an administrative appeal. We will gather additional evidence, analyze the audit report and develop a persuasive argument to support the claim during the appeals process.
8. Possible structured settlement: BPM may be able to assist you with reaching an agreement with the IRS should that be a necessary solution.

Contact our team if your claim has fallen under scrutiny and is being challenged by the IRS.