During the COVID-19 pandemic, Congress authorized one of the biggest financial bailouts for businesses: the Employee Retention Credit. For qualifying businesses, the credit could mean the difference between failure and staying afloat – up to $26,000 in incentives per qualifying employee. Unfortunately, due to a lack of regulatory guidance and the potentially significant financial benefit, the program has been plagued by fraud, or at least, perceived fraud. This has led to significant delays and increasing complaints from businesses in need of the bailout.
Whereas early filers for the credit received refunds relatively quickly, and often without any review, late movers have seen their refund claims held up for years and with little justification. Over and above significant processing delays caused by unexpectedly large volume, in 2023, the IRS imposed a moratorium on the processing of claims. This moratorium, originally intended to last only a few months, has now been in effect for almost a year. Congressional leadership has been ramping up pressure on the agency to process claims as soon as possible to businesses in need of this financial relief.
In a recent statement, the IRS indicated that more than a million refund claims had been delayed because about 10% to 20% showed “clear signs of being erroneous” and another 50% contained an “unacceptable risk” of being improper. Many of these claims were prepared by “promoters” and sought thousands or millions of dollars based on a claimed “shutdown.” The IRS has taken the position, administratively, that the interpretation of “shutdown” should be limited in scope – thus, many claims were, in its view, improper. As a result, the Commissioner has stated that it will begin additional work to “issue payments to help taxpayers without any red flags on their claims” but will “deny billions of dollars in clearly improper claims.” The IRS also recently indicated a significant number of claims have already been denied and hundreds of millions of dollars were repaid by businesses withdrawing their claims.
While the IRS has not been faithful to prior statements or timelines regarding the Employee Retention Credit, affected businesses should prepare for movement at any time. For many, this will mean contact from an auditor or other investigator, requests for documentation, and summary disallowances of refund claims. Certain businesses and preparers will be subject to criminal investigation. At the very least, businesses should expect more scrutiny of their claims. They should prepare for an audit. To succeed in an audit and expedite the refund process, businesses should be prepared to substantiate and explain all information related to the claim – e.g., by having copies of wage statements, income statements, and orders impacting their business in a centralized file. Inability to quickly produce information will be a problem for many. Failure to properly justify a refund claim may result in a disallowance of the claim, civil penalties, an expanded review of other tax issues, and worse (e.g., criminal investigation).
Given the potential high stakes of an audit and the perception of abuse, taxpayers are well-advised to contact a tax lawyer to advocate for them in this process. Aside from the intricacies of the eligibility test, there are many procedural pitfalls for the uninitiated. Understanding the rules, the administrative framework, and the available compliance options is a must to successfully navigate upcoming battles over the Employee Retention Credit.
Thank you to the team at Crepeau Mourges for the above blog.
