What is the ERC & Why is the IRS Pausing It?
ERC, also known as the Employee Retention Tax Credit (ERTC), was a refundable payroll tax credit for businesses that continued paying employees during the COVID-19 pandemic. Under the provision, eligible employers that experience a significant decline in gross receipts during the eligibility periods (March 13, 2020, to September 30, 2021) could claim as much as $26,000 per employee if they paid wages in all eligible quarters.
The ERC was enacted under the CARES Act. It then had several updates as new legislation came out.
Initially, ERC claims were a lesser-known option as most business owners focused on Paycheck Protection Program (PPP) loans. Businesses that claimed PPP loans were originally ineligible to claim the ERC. In addition, the program ended on September 30, 2021.
However, changes to the program opened up new opportunities for businesses to claim the credit. Some businesses that received PPP loans could claim ERC refunds under specific conditions, such as not receiving PPP loan forgiveness. In addition, the IRS extended the deadlines to claim the credit retroactively.
Businesses have (or had) until April 15, 2024, to claim the credit for wages paid in 2020. The deadline for wages paid in the first three quarters of 20201 was April 15, 2025.
A New Industry of ERC Consultancy Firms
The potentially high refund amounts and complexity around ERC refunds gave rise to a new cottage industry of ERC advisors and consultants. While many ERC assistance options genuinely want to help eligible business owners, some of the more aggressive or unscrupulous companies out there have pressured ineligible businesses to apply.
Ineligible and fraudulent claims put business owners at risk of financial or even criminal penalties. There have been growing concerns about the influx of improper claims.
In response, IRS commissioner Danny Werfel ordered the moratorium effective immediately and to last at least until the end of 2023. In the IRS’s official statement, the commission is quoted as saying:
“The IRS is increasingly alarmed about honest small business owners being scammed by unscrupulous actors, and we could no longer tolerate growing evidence of questionable claims pouring in. The further we get from the pandemic, the further we see the good intentions of this important program abused. The continued aggressive marketing of these schemes is harming well-meaning businesses and delaying the payment of legitimate claims, which makes it harder to run the rest of the tax system. This harms all taxpayers, not just ERC applicants.”
The IRS is training auditors to focus on ERC claims posing the highest risk. The IRS Criminal Investigation (IRS-CI) division is working with the Department of Justice (DOJ) to identify fraud and investigate businesses or promoters of fraudulent claims, including potential recommendations for criminal prosecution.
What about Businesses that already Filed for the ERC?
The IRS is continuing to process claims that were filed before the moratorium. However, the processing time is going to be at a significantly reduced speed. The already delayed processing time will likely extend to 180 days or longer.
Part of the reason for the extended delay is that applications are facing additional compliance scrutiny. Any issues or filing errors could further increase the delay. If you only recently submitted your Form 941x, it could potentially take up to a year or longer to receive your refund, if eligible.
The IRS cannot offer any expedited individual claims due to the large number of pending applications and increased compliance measures. The agency also believes most of the claims filed in recent months are fraudulent, as unscrupulous promoters continue to pressure companies into applying regardless of the rules.
Fortunately, if your claim is eligible, you can still apply for an ERTC advance. This service provides the funds for the ERC through a financial institution that issues the advance. It’s essentially selling the refund to access the funds sooner.
If you’re concerned your application may be ineligible due to misleading promises from such a promoter, you may have recourse to protect your business. We’ll explore that in greater depth below.
What if I was going to File for the ERC?
IRS guidance recommends business owners use the moratorium period to carefully review their application to ensure eligibility. It suggests working with a Certified Public Accountant (CPA) or other tax professional who understands ERC eligibility.
In addition, it published a new question-and-answer guide to help clarify eligibility requirements. If you were working with an ERC consultancy firm or agent that requires an upfront fee or their payment is based on the size of the refund, you might want to take extra precautions to ensure it’s accurate.
In addition, we also understand the announcement is frustrating if you are legitimately eligible and are relying on the funds to support your business. We can help with alternative business funding solutions, which we’ll address below.
Who is eligible for the ERC Refunds?
Confusion over ERC eligibility criteria is one of the primary factors driving improper or fraudulent claims. The aforementioned bad actors often skirt the truth and tell business owners to file ineligible claims, such as filing it for supply chain interruptions or suggesting businesses that aren’t recovery startups can apply for 2021 Q4 wages when they can’t.
Here are the eligibility requirements. You can also contact us, a CPA or tax professional, or visit the IRS website’s eligibility checklist for more information.
The qualifications for an eligible employer depend on the period during which the qualified wages were paid. Employers can claim the credit with an original or amended employment tax return but must meet the following qualifications.
Qualifying Businesses March 13, 2020, to December 31, 2020
To qualify for the tax credit on qualified wages paid between March 13 and December 21, 2020, your business must have carried on trade or have been a tax-exempt organization that:
- Received a government order for a full or partial suspension of operations, or
- Experienced a decline in gross receipts of 50% or more for the corresponding quarter in 2019 due to COVID-19-related decline.
Qualifying Businesses January 1, 2021, to September 30, 2021
Businesses applying for the ERC for wages paid between January 1, 2021, and September 30, 2021, must meet the following conditions:
- An appropriate government authority ordered a full or partial shutdown of business operations, or
- Experience a decline of 80% in gross receipts for the corresponding quarter in 2019 due to Covid-related decline.
Qualifying Businesses October 1, 2021, to December 31, 2021
Most businesses do not qualify for the ERC on wages paid during Q4 2021. The sole exception applies to recovery startup businesses. The IIJA amended section 3134 of the Internal Revenue Code to exclude all companies except recovery startups as defined in section 3134(c)(5).
If you reduced employment tax deposits for Q4 2021 wages on or before December 20, 2021, consult with your tax professional to see if you are exempt from the failure to deposit penalty.
Recovery Startup Business
Recovery startup businesses are defined in the American Rescue Plan Act. It refers to any business that opened its doors during the pandemic and meets the following conditions:
- The business opened on or after February 15, 2020.
- The business’s gross receipts don’t exceed $1 million for the individual tax years of 2020 and 2021.
- The business has one or more W2 employees, not including owner-operators or family members.
If a business began during Q2 of 2021, it could not claim the credit for any portion of 2020 or the first two quarters of 2021. Depending on several factors, if you acquired an existing company on or after February 15, 2021, you may or may not qualify for the ERC.
What are the warning signs of fraudulent ERC Promoters?
As part of its efforts to combat ERC fraud, the IRS also published a list of red flags to look out for when considering an ERC consultant or firm. Those warning signs include:
- “Unsolicited calls or advertisements mentioning an “easy application process.”
- Statements that the promoter or company can determine ERC eligibility within minutes.
- Large upfront fees to claim the credit.
- Fees are based on a percentage of the refund amount of the Employee Retention Credit claimed. This is a similar warning sign for average taxpayers, who should always avoid a tax preparer basing their fee on the size of the refund.
- Preparers seeking anonymity by refusing to sign the ERC return being filed by the business as well as supplying their identifying information and a tax identification number. Similar to “ghost preparers,” this limits the risk to just the taxpayer claiming the credit.
- Aggressive claims from the promoter that the business receiving the solicitation qualifies before any discussion of the group’s tax situation. In reality, the Employee Retention Credit is a complex credit that requires careful review before applying.
Unscrupulous promoters may lie about eligibility requirements, including refusing to provide detailed documents supporting their computations of the ERC. In addition, those using these companies could be at risk of someone using the credit as a ploy to steal the taxpayer’s identity or take a cut of the taxpayer’s improperly claimed credit.
What will happen to Businesses that Filed an ineligible ERC Claim?
The IRS is cracking down on ineligible and fraudulent claims, but its main focus is on the various unscrupulous actors pushing small business owners to file erroneous claims. As such, it’s developing new initiatives to help business owners who were misled to submit false claims.
However, business owners who didn’t use such a service or knowingly committed fraud could face similar consequences. In most cases, business owners must repay the refund, plus interest. In some cases of overt fraud, there could be criminal charges.
The IRS-CI investigates various fraud allegations regarding COVID-19 programs, including paycheck protection program loans and ERC claims. Per the IRS report, “As of July 31, 2023, IRS-CI has initiated 252 investigations involving over $2.8 billion of potentially fraudulent Employee Retention Credit claims. Of those, fifteen of the 252 investigations have resulted in federal charges. Of the 15 federally charged cases, so far six matters have resulted in convictions, four of those cases have reached the sentencing phase with the average sentence being 21 months.”
Recourse for Business Owners with a Pending Claim
If you submitted a claim that is currently pending, review it with a tax professional to see if you’re truly eligible or if the claim is erroneous. In all cases, business owners who submitted a claim they now believe to be improper can withdraw it. This applies even if the claim is under audit or awaiting audit. The IRS will provide additional information.
Recourse for Business Owners Who Receive a Refund
The IRS is working on a settlement program for business owners who received an ERC refund check. The federal agency states that businesses can expect the finalized settlement program sometime in the fall of 2023. Wait until the program is finalized before taking action. We will keep you updated on any new information.
What are my business funding options during the ERC Pause?
The ERC refund presented a needed lifeline for eligible business owners. Instead, you must now wait until the IRS resolves the issues around improper claims and fraud. You won’t be able to submit a claim until January 2024 at the earliest, potentially longer.
Fortunately, there are alternative funding options to help your business grow. You may be interested in one of the following small business loans:
- Bad credit business loans.
- Business lines of credit.
- Business loans for women.
- Business term loans.
- Equipment financing.
- Accounts receivable financing.
- Merchant cash advance.
- SBA loans.
- Revenue-based loans.
- Working capital loans.
- ERTC Advance (if you already filed for the ERC refund).
IRS Pauses New ERC Claims – Final Thoughts
It’s truly unfortunate that the program is being placed on hold due to bad actors trying to exploit it. It’s also frustrating that the IRS hadn’t taken more proactive measures to stop or prevent fraud prior to the rising concerns.
It’s now a waiting game for eligible business owners until the moratorium is lifted. In the meantime, you can review your claim to ensure it’s being filed correctly.
Contact us if you have more questions on the ERC refund claim moratorium or to apply for an ERTC advance Our funding experts can help you find the best business financing options to support your company.
