Earlier this month, the IRS announced that it was implementing a moratorium on the acceptance of new Employee Retention Credit claims until 2024. Any businesses that had planned to file a claim in the coming months must wait until 2024, when a series of new measures to prevent fraud will be in place. 

The pause comes amid concerns about the number of fraudulent applications being made to the IRS. Determining eligibility for the ERC is a complex undertaking, and there are rising concerns that many businesses are being deceived into applying for these credits erroneously. 

IRS Commissioner Danny Werfel comments: “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”.

What is the Employee Retention Credit?

The Employee Retention Credit (ERC), sometimes referred to as the Employee Retention Tax Credit (ERTC) is a COVID-era tax credit designed to enable small businesses to continue paying their employees throughout the pandemic, even if they were fully or partly closed. 

The credit covered up to 50% of employee wages between March 12, 2020 and January 1, 2022. Employers may retroactively claim this credit by filing an amended payroll tax return. Employers with legitimate claims stand to recognize significant tax benefits from a successful application. 

Who is Eligible?

The ERC came with a series of eligibility requirements, which are published on the IRS website here: Employee Retention Credit Eligibility Requirements. In general, the businesses and tax-exempt organizations that qualify meet one of the following criteria:

• Were shut down by a government order due to the COVID-19 pandemic during 2020 or the first three calendar quarters of 2021

OR

• Experienced the required decline in gross receipts during the eligibility periods during 2020 or the first three calendar quarters of 2021

OR

• Qualified as a recovery startup business for the third or fourth quarters of 2021

Employers must have paid qualified wages to obtain the credit. Employers cannot claim the credit on wages that were reported as payroll costs under the Paycheck Protection Program loan forgiveness, or on payroll costs associated with shuttered venue operators grants or restaurant revitalization grants. 

In the announcement of the moratorium, the IRS noted that many small business owners are being targeted by aggressive sales and marketing techniques designed to mislead businesses about their eligibility for this tax credit. Business owners should be particularly wary of unsolicited communications, upfront fees, and blanket statements concerning their business’s eligibility. 

Instead, business owners should consult with a trusted accounting firm to determine whether their business is eligible to apply for the Employee Retention Credit. Opt for an accounting firm with a well-established reputation in your local community. The right firm will work closely with you to determine whether your business is eligible and can assist you in filing a robust, detailed application if you do qualify.  

Why Has the IRS Paused Claim Submissions?

In a nutshell, the IRS has put this moratorium in place because it believes many small business owners are being tricked into filing a claim, regardless of whether they qualify. 

Commenting on the moratorium, IRS Commissioner Danny Werfel said: “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.”

If businesses are found to have falsely applied for the Employee Retention Credit, they are responsible for paying the credit back in full, plus any associated penalties and interests. This could lead to significant financial damages for many businesses.

LBMC: Your Trusted Kentucky & Indiana Accounting Firm

Our team has been serving the local business community in Kentucky and Indiana for over 40 years. We take a long-term, relationship-based approach to helping our clients build efficient tax strategies while remaining in compliance with all laws and regulations. 

If you would like to discuss your business’s eligibility for the Employee Retention Credit or have any other tax questions, contact a tax advisor today.