The Employee Retention Credit (ERC) was a lifeline for businesses during the COVID-19 pandemic, but things went south due to widespread fraud and abuse. If you’re still waiting for an ERC credit or are now questioning your eligibility, here’s what you should know.
The ERC offered substantial tax credits to employers who kept workers on payroll during the COVID-19 pandemic. It was almost too good to be true: fill out a few extra lines on your federal return, and you’re handed the credit. Widespread fraud and abuse changed all of that.
In response, the IRS has taken aggressive action, including halting the processing of new claims and issuing more than 20,000 disallowance letters. This has left many legitimate claimants in limbo, unsure about the status of their credits or whether they even qualified in the first place.
More on the Processing Delays and Moratorium
The IRS imposed a moratorium on processing new ERC claims in September 2023 to combat fraud. While the agency continues to work through a backlog of existing claims, processing times have slowed dramatically due to stricter compliance reviews. Businesses that filed legitimate claims before the moratorium may still be waiting for credits.
In the meantime, “taxpayers are encouraged to review IRS guidance and tools for helping determine ERC eligibility, including frequently asked questions and a new question and answer guide… to help businesses understand if they are actually eligible for the credit,” the IRS states. “Businesses should seek out a trusted tax professional who actually understands the complex ERC rules, not a promoter or marketer hustling to get a hefty contingency fee. Businesses that receive ERC payments improperly face the daunting prospect of paying those back, so we urge the utmost caution. The moratorium will help protect taxpayers by adding a new safety net onto this program to focus on fraudulent claims and scammers taking advantage of honest taxpayers.”
More About Withdrawals and Disallowances
In June 2024, the IRS began mailing over 20,000 disallowance letters to taxpayers whose ERC claims were deemed ineligible. If you receive a disallowance letter, carefully review the reasons provided and consider your options for appealing or providing additional documentation. The IRS instilled an ERC Voluntary Disclosure Program to repay incorrect ERC claims at a discount, but that program has since been closed. It may reopen in the future, but for now, you may have options to reduce the amount of your claim or amend your return.
If your claim remains unprocessed and you’re now unsure about your eligibility, you may be able to withdraw the claim. The withdrawal process is exclusively for taxpayers whose ERC hasn’t been paid yet or those who received a check but haven’t cashed or deposited it. But keep this in mind:
“If you request to withdraw your claim, you’ll be asking the IRS not to process your entire adjusted employment tax return (Form 941-X, 943-X, 944-X or CT-1X) for the tax period that included your ERC claim. Claims that are withdrawn will be treated as if they were never filed. The IRS will not impose penalties or interest,” the IRS states.
The ERC situation remains fluid, and legislative changes may modify statutes of limitations, penalties, and more. If you’re still navigating it, the key is to stay informed, maintain thorough documentation, and seek guidance to mitigate potential penalties and resolve uncertainties. While the ERC has become complex and contentious, legitimate claims should still be honored. Pack your patience and diligence as the IRS balances fraud prevention with processing valid claims. Feel free to contact us with questions.