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Kevin Sweeney's article “IRS Announces Employee Retention Credit (ERC) Moratorium and Settlement Initiatives,” in The Legal Intelligencer
Reprinted with permission from the October 17, 2023, edition of The Legal Intelligencer © 2023 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com.
IRS Announces Employee Retention Credit (ERC) Moratorium and Settlement Initiatives
By: Kevin F. Sweeney
The Employee Retention Credit (ERC) has been talked about a lot in the press over the past year. In fact, many businesses can’t make it through a day without getting a phone call from or seeing an advertisement by a company promoting ERC-related services. With the potential for businesses to receive a federal tax credit of up to $26,000 per employee, it is easy to see why.
Although the ERC was designed to put money into the pockets of businesses experiencing disruptions during the COVID-19 pandemic, it also created a cottage industry of ERC advisers competing for those businesses as clients. While some ERC advisers have taken care to ensure that the businesses they assist are actually entitled to the credits they claim, it has been reported that other so-called ERC mills routinely mislead businesses into claiming the credit regardless of eligibility.
The ERC mills have not gone unnoticed by the Internal Revenue Service (IRS) as is evidenced by IRS press releases IR-2022-183 and IR-2023-40. Despite these warnings from the IRS, ERC claims continue to be filed at a pace that the IRS is struggling to keep up with. Moreover, the IRS has reported seeing a surge in particularly questionable claims.
In an effort to get a handle on this potential problem, the IRS issued press release IR-2023-169 on September 14, 2023 placing a moratorium on its processing of new ERC claims until at least December 31, 2023. Pursuant to this guidance, claims that have already been submitted will continue to be processed, but at a slower rate so that the IRS has time to conduct detailed compliance reviews. This may include requests for additional documentation to verify claims. The IRS anticipates that these new procedures will result in existing claims taking approximately 180 days with claims selected for audit taking considerably more.
In addition to informing the public about its moratorium on new claims and its slower processing of existing claims, the IRS announcement indicated forthcoming settlement initiatives designed to give businesses that have fallen victim to unscrupulous ERC mills a path to repay their claims, possibly without the imposition of penalties. The details of these initiatives are still being developed by the IRS and are complicated by the dilemma of how to deal with the fees paid by the businesses. Because of this, even if the IRS allows businesses to pay back erroneous claims without penalty, hard-working businesses could find themselves in a worse financial position than before they were convinced to file an ERC because of the fees paid to the mills.
Given the moratorium and increased scrutiny, businesses with defensible ERC claims may now need to fight to get the IRS to pay up. The IRS is likely to reject many of the claims yet to be processed and others are likely to take far too long for the IRS to pay out. For claims that are rejected and/or not processed within six months, businesses have options to hold the IRS accountable. These options include appealing the rejection and/or filing civil lawsuits against the IRS in federal district court or the U.S. Court of Federal Claims to force them to pay up. Whether those options make good business sense will depend on the amount at issue and the legal strength of the claim. This is best evaluated by a tax attorney with experience litigating tax cases.
For businesses concerned about the ERCs they claimed, now is the time to get a second opinion. For problematic claims, an IRS settlement initiative may be the best chance of escaping costly penalties and, in egregious cases, possibly criminal prosecution. The opposite may be true for legitimate claims, which should generally not be given up easily but rather vigorously defended. Given the complexity of the laws and regulations concerning ERC, the difficult choices facing businesses, and the amounts at issue in many of these matters, it would be prudent for most businesses to seek independent tax advice from an attorney with ERC experience before charting a path forward.
Kevin F. Sweeney is a former federal tax prosecutor. He is currently a Shareholder in the Philadelphia Office of Chamberlain Hrdlicka, where he focuses on IRS audits, civil and criminal tax litigation, white-collar criminal defense, and IRS whistleblower matters. He may be reached at (610) 772-2327 or by email at ksweeney@chamberlainlaw.com.