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IRS Keeps Hold On Employee Retention Credit Claims to Protect Small Businesses from Fraud
Over the past year, the Internal Revenue Service (IRS) has discovered billions of dollars in potentially fraudulent Employee Retention Credit (ERC) claims. Due to the high number of claims from ineligible employers, the IRS put an immediate hold on processing new claims for the ERC in September 2023. The moratorium, which the IRS says may be lifted later this spring, was put in place to protect small business owners from aggressive promoters and scams that put businesses at financial risk. While the IRS has new ERC claims on pause and works to investigate possible fraud, business owners still have the opportunity to protect themselves from potential civil and criminal penalties.
ERC Background and Rise of Scams
The ERC was signed into law in 2020 as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act to help employers struggling during the COVID-19 pandemic. Eligible businesses affected by COVID-19 could receive a refundable tax credit of up to 70% of the wages they paid to employees in 2021. To be eligible, a business's operations must have been fully or partially suspended due to the pandemic, and the business must have experienced a corresponding significant decline in its gross receipts in 2021. The IRS has issued an ERC eligibility checklist to help businesses understand eligibility requirements.
The IRS began warning the public about potential scams designed to trap business owners in fall 2022, and by March 2023, the ERC scams landed the top spot on the IRS' annual "Dirty Dozen" list of tax scams to be aware of in the coming year. The bogus advertisements flooded TV, radio and social media, promoting false information about eligibility, and scammers either charged exorbitant fees to "help" business owners who did not qualify or stole valuable personal information to commit fraud.
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