Employee Retention Tax Credits are nearing their 4th birthday since their inception as a COVID relief program within the Cares Act in March of 2020. Most employers ignored ERC credits during 2020 since they took PPP loans instead, and originally an employer could not claim both PPP loan money and ERC tax credits—so not much thought was given to ERC credits—-until late December of 2020!! Legislation was enacted December 27, 2020 which permitted employers who previously had taken PPP loan money to also apply for ERC tax credits on wages not already used for the PPP loan program. When PPP loan rules were changed during 2020 such that employers could use up to 24 weeks of payroll/rent, etc. to have their loans forgiven (originally the PPP loan money had to be spent in 8 weeks), many employers did have “excess wages” during 24 weeks which were not needed to forgive their PPP loan.
DURING 2021, ALL SEEMED FINE WITH THE ERC TAX CREDIT PROGRAM
As I go down “memory lane” as to learning and assisting clients with ERC tax credits, year 2021 seemed fine in that CPA’s and other tax experts were learning about the ERC tax law, to include both eligibility criteria and calculations to support eligible employers. The professional tax community learned that eligibility was based on one of two primary qualifiers. Either an employer had a “significant reduction in gross receipts” in 2020 and 2021, as compared to pre-pandemic 2019, OR, the employer did not meet the gross receipts test BUT did have some operations “suspended/restricted,” partially or completely, by a COVID government order/mandate. We all knew that the government ordered operational restrictions needed to be “more than nominal” in nature, not merely nuisances, and that we all were searching for copies of state, city, county, etc. government orders to support the “government order suspension test.” AccuPay was receiving eligibility reasons and calculations from reputable CPA firms and filing amended 941X claims for those clients who used AccuPay for payroll services. We monitored the IRS receipt and processing of client ERC claims, and made weekly calls to the IRS to check on the status of ERC claims. We identified that some of the larger claims (generally those above $200K per 941X) were taking much longer than smaller claims, but managed to ultimately get the IRS to process them after many phone calls (we also used Taxpayer Advocacy for larger ERC claims which did not refund out for a year or more, but finally did!). So the ERC program was actually running as it was intended for much of 2021, except for the IRS taking a very long time on larger claims—but all in all, fine.
THEN THE “FREE MONEY” OFFERED BY THE FEDS ATTRACTED BAD ACTORS
Year 2020 and certainly 2021 were learning years for tax professionals, as I recall the chronology of events, but in year 2022 we started hearing about the “promoters” who the IRS referred to by mid-2022 as “ERC mills.” We all, myself included, were receiving numerous emails, texts, TV and radio ads, and even old fashioned “in the mail flyers” about ERC tax credits. Several of the flyers looked as if they came from the IRS itself, and a very large ERC promoter networked with banks all over the country, promising them a 5% cut of the ERC tax credit in exchange for using their customer database to inform employers of the ERC tax credits available to them. I recall being at my own community bank and sharing my less than favorable opinion of my bank sending out promotional flyers to their customer database, since they knew virtually nothing about this relatively new tax law. I thought that a bank getting 5% of a million dollar ERC tax credit, or $50K, simply by referring their own customer database, was not professional since it may not have served the employers well. After that, an entire “cottage industry” of “ERC consulting firms” flooded the market, with many claiming they could qualify employers for ERC tax credits who had been turned down/told they did not qualify for ERC credits by their CPA firm and other advisors. I had one ERC promoter tell me that they “qualified” an employer for ERC who had been told they did not qualify by “over 7 other advisors”—-and this “magical firm” had the “secret sauce” others did not have. Most of the promoters in this industry built organizations of “contract sales reps” who they would pay a 5% cut of the credit amount in exchange for the referral/lead. ERC firms/mills were promoting that they obtained “billions of dollars” of ERC tax credit money for employers, and they likely did! As of January 2024, the IRS indicated that they had paid out $230 Billion in ERC credits/IRS refunds from a program they budgeted/projected would cost approximately $50 Billion.
IRS WARNINGS DURING THE LATTER PART OF 2022 AND THROUGHOUT 2023
The IRS mismanaged the ERC program in various ways, with the biggest culprit being limited documentation for employers to obtain the ERC money. If one remembers the days of “no doc” mortgages and their later collapse, the IRS version of that was “no doc” ERC claims. The employer only needed to enter their “ERC qualified wages” on a Form 941X and multiply by the ERC tax credit percentage (50% in 2020 and 70% in 2021). The employer did not have to indicate “why” they qualified nor did they have to include any calculations, by quarter, of their tax credit amounts. The IRS never knew and still does not know “why” employers qualified nor “how” they calculated their ERC tax credits. The lack of documentation and IRS system failures was such that rather late in the ERC program, during 2023, the IRS announced that they denied over 20,000 ERC claims since the employers were either not in existence during the years of their claims or did not have any employee payroll for claimed ERC periods. Many of the ERC “mills” would “qualify anybody” since it was “free money” for both the employer and the promoter—free, huge money! Employers felt their claim was “approved/validated” when they got their IRS refund checks in the mail, and shared the names of those “expert firms” with others—–But the problem was that many of the ERC claims were not valid, the employers did not meet the qualifications for the ERC money, and the IRS increasingly knew it. The IRS issued many “warnings” about possible ERC fraud– “Make sure you use a trusted tax advisor,” “If it seems too good to be true it just may be,” so forth and so on. However, the volume of the ERC claims increased in spite of the numerous IRS warnings, and reached upwards of 50,000 claims per week in the summer of 2023, due to the large volume of promoters who were calling employers non-stop. I am aware of IRS agents who got calls about applying for ERC claims and did not even have a business.
On September 14, 2023, the IRS issued a “moratorium” on processing any further ERC claims they received after September 14, and indicated that they would continue to work on/process ERC claims “in the que” which they had received before the moratorium date, but those returns would take twice as long to process. As it turns out, the general sense by experts is that the IRS discontinued processing any claims in the que and focused on improving their fraud prevention procedures, digitizing the “paper claims.” (Most ERC claims are prepared on paper and mailed to the IRS). The promoters then started promoting that the ERC deadline was nearing and to “get your claim in soon” to avoid missing out on IRS refunds. On October 19, 2023, the IRS issued its “pending claim withdrawal process,” IR-2023-193, which encouraged employers with pending ERC claims, not yet processed, to make a thorough review of their pending claims and if they felt they were not proper/duped by a promoter, to “withdraw” their pending claims and it would be treated as if the ERC claim was never made. Some employers did withdraw ERC claims (IRS has not revealed any stats on that) but the ERC promoters continued to aggressively call on employers, promoting that “time is running out.”
On December 21, 2023, the IRS announced its “Voluntary Disclosure Program” (VDP) in which employers who felt their ERC claims were improper could repay 80% of their ERC funds already received, keep the interest income received on the ERC claims (which is not an insignificant amount), not pay any penalties or interest, and in exchange the employer would provide the IRS with the names/contact information for their ERC advisor. The IRS made it clear that this “pay at a discount offer” was the “best deal” they would ever get for returning invalid money, and most experts agree that this is the “best deal” an employer of an invalid claim would get. The deadline for this VDP/repayment is March 22, 2024, and the purpose of this program is to help “innocent employer-victims” who had been lured into the ERC credits by aggressive promoters/consultants. The VDP does not insulate an employer from “fraud” if they were complicit with the promoting firm in filing improper claims. (In other words, this program is not intended as a relief measure for employers who knowingly participated in filing bad claims.)
AND PROPOSED LEGISLATION ON JANUARY 31, 2024
The House passed H.R 7024 on January 31, 2024, the highlight of which is providing enhanced child tax credits to lower income taxpayers with the proposal being “paid for” by early termination of the ERC program and imposing large penalties on a newly defined term, a “COVID-ERTC promoter.” The Senate has yet to take up this legislation but many feel it will be passed into law within the next month or so. The House version provides a deadline for filing an ERC claim as of January 31, 2024 (already past), instead of the current much longer deadlines. H.R 7024 also extends the statute of limitations for auditing ERC claims for up to 6 years from the date the claim was filed, which certainly signals that the IRS, with an enhanced budget, will audit many ERC claims—We have heard many are now going on, but we have not seen an IRS letter yet from one of our clients. The House- passed bill also imposes very harsh penalties on COVID-ERTC promoters (massive clawback of fees paid to promoters), and provides that the IRS can obtain lists of clients of the ERC promoters.
PROMOTERS MOVE ONTO OTHER WAYS TO MAKE SIGNIFICANT MONEY ON THE ERC PROGRAM
I received an email on February 1, 2024, from an ERC promoter who was offering me “80 cents on the dollar” for my pending ERC claim (NOTE—AccuPay did not qualify for ERC funds and has no pending claim). So a bill passes the House ending the ERC program very early on January 31, and the next day I get an email from somebody offering to buy my ERC claim for 80% of the claim amount—so a promoter collects 20% on assisting in filing an ERC claim, then offers to buy the claim for another 20% profit (plus interest on the claim, I presume)—not exactly what Congress or the IRS intended for this COVID relief program for employers!!
LAST IRS ANNOUNCEMENT ABOUT “7 SUSPICIOUS SIGNS” OF AN INVALID ERC CLAIM
On February 13, 2024, the IRS released IR-2024-39, titled “7 suspicious signs that your ERC claim may not be valid/correct”-–you can look up the entire list online at IR-2024-39, but the ones I have seen the most include the following:
- Too many quarters of ERC claims—-the maximum number of ERC claims is generally 6, but most employers do not qualify for all 6 (Q3 of 2021 is especially difficult to qualify for unless you meet the gross receipts reduction test.)
- Government orders which do not qualify the employer—–an IRS audit will ask the employer for copies of the COVID government orders which was their basis for qualifying based on “suspension of operations.”
- Claims which are based on “supply chain” orders—-the IRS has clarified that very few employers will qualify for “supply chain” orders—qualification would require that the employer obtain COVID government orders from major suppliers which disrupted them.
- Claims for entire quarters which are based on “suspensions of government orders”—I spoke to one promoter who told me that if a client of theirs qualifies for part of a quarter, they simply take the ERC credits for the entire quarter—I told the promoter that sure makes the calculation process a lot easier than calculating only through the “order lift date,” but that was not the way in which the ERC law reads—they ignored my comment and said that was their “internal policy.”
SO WHAT SHOULD EMPLOYERS INVOLVED IN THE ERC PROGRAM DO NOW?
The IRS is encouraging employers to review their ERC claims, whether they have already received the IRS refund checks or their claims are pending with the IRS, unprocessed. If an employer does not feel that their claim is legitimate (usually based on their perception of “eligibility”, the amount of questioning/probing by the ERC consultant, or “seems too good to be true”), we advise that the employer contact a reputable tax consultant (their CPA, tax lawyer, etc.) to discuss and possibly review the merits of their ERC claims. If all seems fine, nothing to do. If the “trusted tax advisor” feels that some or all of the ERC claims are not proper/valid, then a discussion about using either the ERC withdrawal process or the Voluntary Disclosure Program may be warranted. Neither program insulates the employer from fraud if they were complicit in filing for ERC funds, so both programs are intended for “innocent victim employers” who relied on an ERC promoter (who did not know what they were doing or simply wanted to obtain as much money as possible to share in) and now wish to “make it right.” The IRS is certainly conveying they will audit a significant number of ERC claims and are going after the COVID-ERTC promoters.
I am happy to answer any questions about the ERC program, as best I can—simply email larry@accupay.com the author of this PayDay! Visit our blog for our previous PayDays regarding Employee Retention Tax Credits.
PayDay is an email communication of payroll news, legal updates and tax considerations intended to inform clients and colleagues of AccuPay about current payroll issues and planning techniques. You should consult with your CPA or tax advisor before implementing any ideas, comments or planning techniques.