ERC Newswire

By ERCbee, November 17, 2022

Nearly 32 months after the Employee Retention Credit (ERC) was enacted into law under the CARES Act, the IRS is still facing significant processing delays for those who qualify for the federal tax refund — and potentially tens of thousands of erroneous claims filed for those who don’t. 

According to a recent report released by the Treasury Inspector General for Tax Administration (TIGTA), the IRS has flagged 11,096 suspicious returns claiming more than $2 trillion in ERC refunds as of March 2022 — almost equal in value to the $2.2 trillion budget allotted to cover the entirety of all CARES Act provisions. 

This, coupled with major internal oversight gaps, deficient or nonexistent controls to prevent payments for fraudulent claims, an influx of amended returns seeking the credit, and ongoing IRS staff shortages related to COVID-19, has prevented employers who rightfully filed for their ERC refund from getting the immediate emergency assistance the tax credit was meant to provide. 

Given the requirement to limit deductions on federal tax returns to qualify, many small and midsize businesses have had to pay out of pocket to cover their costs in the midst of rising inflation while they wait for their ERC checks to arrive, in stark contrast to the program’s original intention and promise. 

So, what went wrong? And what can employers expect next? Let’s explore.

WHAT IS THE ERC

As defined by the IRS, the Employee Retention Credit (ERC) is “a refundable tax credit designed for businesses who continued paying employees while shutdown due to the COVID-19 pandemic or had significant declines in gross receipts from March 13, 2020 to December 31, 2021.” 

Qualifying businesses include those who (1) have 500 or fewer employees, (2) were required to fully or partially suspend operations tied to government orders, (3) saw revenue reduce by 20% or more for any given quarter within the qualifying periods, (4) were required to limit office space occupancy due to social distancing mandates, (5) were unable to obtain critical goods, materials, or supplies due to shutdowns, (6) had employees who were prevented from going into work due to shelter-in-place orders, and/or (7) started a business after February 15, 2020 that had annual gross receipts totaling less than $1 million — all while keeping employees on payroll despite these drastic disruptions. According to the IRS, “Eligible taxpayers can claim the ERC on an original or amended employment tax return for a period within those dates.” 

This broad criteria plus the ability to file amended tax returns to retroactively claim up to $26,000 per employee retained throughout the pandemic promised tangible relief to the resilient businesses that drove jobs and growth in this country against all odds, but that promise has since been stifled by the IRS’s infrastructural inability to oversee, process, and pay qualified filings in a timely manner. 

WHAT WENT WRONG

Given the sheer number of companies that could qualify for substantial ERC payouts, along with the extensive publicity given to the program by both Congress and the IRS, the filings that flooded in were met with minimal – if any – IRS systems, controls, and dedicated personnel in place to manage them. 

When outlining why the IRS did not even begin processing qualified ERC claims until 12 months after the pandemic relief legislation was first enacted, the TIGTA stated, “A lack of updated programming and procedural guidance … [along with] a lack of training, erroneously suspended claims, and a lack of prioritization of claims contributed to additional delays processing claims.” A more recent update from the IRS revealed that, as of November 2, 2022, 2.5 million Forms 941 (the tax form containing the ERC) and 264,000 Forms 941-X (the amended tax return form that makes it possible to retroactively claim the credit and other COVID-19 relief provisions) were still unprocessed. 

Add to that the fact that the rules for claiming the credit changed while the program was still active (from up to $5,000 per employee for all of 2020 to $7,000 per employee per quarter, excluding Q4 for non-startup recovery businesses, in 2021), and it becomes clear how the stacks of unprocessed claims continued piling up while fraudsters and unaccredited third-party ERC “mills” jumped at the lucrative opportunity to capitalize on the program’s weaknesses. Through aggressive marketing campaigns and direct-mail efforts, these bad actors encouraged countless businesses to leverage their services to apply for the credit whether those businesses actually qualified for it or not. According to that same TIGTA report, this helped contribute to “$45 million in potentially erroneous nonrefundable employer tax credits being allowed” from amended returns alone. 

WHAT’S HAPPENING NOW

Within the TIGTA’s report, nine recommendations were made to address the discovered disparities, including the prioritization of backlogged claims processing. Of those recommendations, the IRS agreed to eight. 

A quick peek at the IRS’s current web page reveals that the rising backlog for Forms 941 (e.g., the ERC) has been added to its list of mission-critical functions. While the organization says that electronic filings which received an acknowledgement do not require any further action “other than promptly responding to any requests for information,” employers are understandably becoming increasingly frustrated with both the delays in payment and the limited information available to them about the status of their return when they do make contact with an IRS official.

To help address this and other issues, President Biden recently signed the Inflation Reduction Act (IRA) into law on August 16, 2022, which allocates nearly $80 billion in new funding over the next decade for the IRS. Of that hefty sum, the bulk ($45.6 billion) is slated to be utilized for enforcement of mission- critical functions (including clearing the backlog of ERC filings yet to be processed), while the rest will be split between business system modernization, taxpayer services, and operational support, among other items. 

WHAT TO EXPECT NEXT

As part of its response to this compounding issue, the IRS has implemented additional screening criteria to fend off fraudulent claims and is warning companies to be wary of suspicious third-parties promoting ERC assistance without the proper paperwork, qualifications, or accreditations. If you are a small or midsize business that kept doors open and employees on payroll throughout the pandemic, it has never been more important to partner with a Certified Public Accountant and/or accredited ERC processing team while claiming the tax refund you are owed. To see if your business truly qualifies for the ERC benefit, please schedule a consultation with one of our specialists by visiting phibee.wpengine.com or calling our office today.