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Updates From Congress and the IRS

Employee Retention Tax Credit

In an effort to crack down on false and fraudulent Employee Retention Credit (ERC) claims, the Internal Revenue Service (IRS) has introduced several new developments. One of the key updates is the extension of the agency's moratorium on processing claims, which has been extended indefinitely. This moratorium not only impacts the processing of ERC claims but also affects the ERC withdrawal program. Additionally, there is a legislative deal in the works that could potentially end the ERC as early as January 31, as part of the 2024 federal budget.

The IRS has been actively working to combat fraudulent ERC claims and protect taxpayers. One of the recent developments is the push for faster processing of ERC claims by the Taxpayer Advocate. This is aimed at ensuring that funds reach eligible taxpayers in a more timely manner. To further strengthen their efforts, the IRS has also requested Congress to ban contingency fees for ERC claim preparers. This would help prevent any potential incentives for preparers to inflate the amount of the ERC claimed. Moreover, the IRS is seeking to establish penalties for ERC promoters and extend the statute of limitations on assessment for ERC claims.

It is important to understand the background of the ERC and why these measures are being taken. The ERC is a legitimate tax credit designed to assist businesses that continued to pay their employees during the COVID-19 pandemic or experienced a significant decline in gross receipts. However, unscrupulous promoters have been encouraging ineligible businesses to file improper ERC claims, leading to rampant fraud. The IRS has been diligently working to combat this issue for almost two years.

The IRS Commissioner has made it clear that there is currently no definitive end date for the moratorium on processing ERC claims. The agency is currently focused on reviewing the large volume of claims received in the months leading up to September 14, 2023. This, combined with the implementation of new processes and procedures to identify improper claims, has contributed to the delay in processing. The IRS is utilizing scanning technology to digitize the ERC return backlog, but this process is expected to continue until at least April.

In addition to the moratorium, the ERC withdrawal program is also ongoing. This program allows employers who have filed ERC claims but have not yet received a refund to withdraw their submission and avoid future repayment, interest, and penalties. The withdrawal program will continue until the moratorium comes to an end.

On a legislative front, negotiations over the federal government's 2024 budget have resulted in discussions about expanding the child tax credit and various business tax credits. As part of this negotiation, there is a proposed deal to end the ERC program on January 31, 2024. However, this depends on the success of the negotiations and the passage of the budget. If the deal does not go through, employers will still have time to file ERC claims for 2020 and 2021 until April 15, 2024, and April 15, 2025, respectively.

The proposed legislation also includes provisions to extend the statute of limitations on assessment to six years and increase penalties for aiding and abetting the understatement of a tax liability related to ERC claims. These provisions aim to further deter fraudulent activities and hold ERC promoters accountable. However, the legislation is subject to the ongoing budget negotiations and faces opposition from some members of Congress.

While the IRS Commissioner is extending the moratorium on processing ERC claims, the IRS National Taxpayer Advocate is advocating for faster processing of claims. The National Taxpayer Advocate's Annual Report to Congress highlights the significant backlog of unprocessed claims and emphasizes the financial hardship legitimate businesses face due to the delays. The IRS Commissioner has also proposed additional legislative enforcement measures against illegitimate ERC claims, including the banning of contingency fees for preparers, increased penalties for preparers of ineligible claims, and an extension of the statute of limitations on assessment.

The IRS's efforts to combat false and fraudulent ERC claims are ongoing. The extension of the moratorium on processing claims, the potential early end of the ERC program, and the proposed legislative measures aim to protect taxpayers and ensure the proper distribution of funds. It is crucial for businesses to understand the eligibility criteria for the ERC and to file legitimate claims to avoid penalties and legal consequences. The IRS continues to work towards expediting the processing of legitimate ERC claims to provide much-needed relief to eligible taxpayers.

Other news included:

  • The Taxpayer Advocate pushing for speedier ERC claim processing to ensure funds get to taxpayers more quickly.
  • The IRS requesting that Congress ban contingency fees for ERC claim preparers, establish penalties for ERC promoters, and extend the statute of limitations on assessment for ERC claims.

Background on the ERC

The ERC is a valuable tax credit that provides legitimate financial relief to businesses impacted by the COVID-19 pandemic. It was specifically designed by Congress to support businesses in keeping their employees on payroll and navigating the economic challenges brought on by the pandemic. However, the effectiveness of the ERC has been compromised by widespread fraud and unethical practices. Unscrupulous promoters have encouraged ineligible businesses to file fraudulent claims, undermining the integrity of the program. Recognizing this issue, the IRS has been dedicated to combating fraudulent ERC claims for nearly two years, working diligently to protect the program and ensure its benefits reach those who truly need them.

IRS Commissioner Keeps Everyone Guessing on Moratorium for ERC Claims Processing

During recent appearances before Congress and at a tax conference hosted by the Washington D.C. Bar, the IRS Commissioner revealed that there is no set timeline for the conclusion of the moratorium on processing ERC claims received on or after September 14, 2023. While the IRS is still handling ERC claims submitted before this date, the Commissioner acknowledged that the processing time has been extended due to the high number of fraudulent claims. This is particularly impactful considering that nearly all of the ERC claims currently under review were filed in the three months leading up to September 14, 2023.

Efforts to streamline the identification of improper ERC claims have contributed to the processing delay. To enhance efficiency, the IRS has implemented scanning technology to automate the transcription of previously manually entered information. While approximately one-third of the ERC return backlog has been digitized, this ongoing process is expected to continue until at least April. The Commissioner informed Congress that the funds allocated to the IRS through the Inflation Reduction Act are instrumental in establishing these fraud-prevention measures.

The ongoing ERC withdrawal program provides employers who have filed ERC claims but have not yet received a refund with the option to withdraw their submission, avoiding any future repayment, interest, or penalties. It is important to note that the IRS has stated that the withdrawal program will conclude simultaneously with the expiration of the moratorium.

There's a Chance Tax Laws Could Pull the Plug on the ERC Program Sooner

During discussions about expanding the child tax credit and various business tax credits, Congress is considering the possibility of ending the ERC program on January 31, 2024. This decision is part of negotiations over the federal government's 2024 budget, which is already three months late and with a government shutdown looming. If the deal is not passed, employers will still have the opportunity to file ERC claims for 2020 until April 15, 2024, and for 2021 until April 15, 2025.

The proposed legislation also includes provisions to extend the statute of limitations on assessment to six years and significantly increase the penalty for aiding and abetting the understatement of a tax liability by an ERC promoter. The penalty would be set at $200,000 (or $10,000 in the case of an individual) or 75% of the gross income derived from assisting with an ERC claim, whichever is greater. Currently, a penalty of $1,000 may apply to those who knowingly contribute to an understatement of another person's tax liability. Additionally, the legislation aims to raise the penalty for paid tax return preparers who fail to comply with the due diligence requirements related to the ERC, increasing it to $1,000 from $500.

In accordance with the listed transactions provisions, ERC promoters will also be required to submit return disclosures and furnish client lists to the IRS upon request. An ERC promoter, as defined by the legislation, refers to any individual who offers aid, assistance, or advice in relation to an affidavit, refund, claim, or any other document pertaining to an ERC. This applies to individuals who charge fees based on the credit amount or meet the gross receipts test.

The penalties for providing aid, assistance, or advice will be applicable to services rendered after March 12, 2020, while the due diligence requirement will come into effect upon the enactment of the legislation.

However, the fate of the ERC program remains uncertain as Congress is currently focused on securing government funding before the next budget deadline on Friday, January 19, 2024. If a signed budget or new continuing resolution is not passed, the government will face a shutdown starting on January 20, 2024, and a complete shutdown on February 3, 2024. In addition, the proposed legislation is facing opposition from some members of Congress, including Senator Charles E. Grassley (R-Ia.), who expressed doubt about its chances of passing during the January period.

The IRS National Taxpayer Advocate Urges IRS to Speed Up Processing of ERC Claims

While the extension of the ERC processing moratorium by the IRS Commissioner is in place, there is a strong push from the IRS National Taxpayer Advocate to expedite the processing of ERC claims. According to the Annual Report to Congress from the National Taxpayer Advocate, it is highlighted that during the two-month period surrounding the initiation of the moratorium, the IRS received an average of 45,000 ERC claims per week. However, the processing rate was significantly lower, with only about 150 claims processed per week. As a result, there is currently an estimated backlog of 1 million unprocessed claims as of early December, and this number is anticipated to increase to nearly 1.3 million by February.

In addition to taxpayers anxiously awaiting the processing of their ERC claims and the disbursement of funds, they are unfortunately left in the dark regarding the status of their claims and the expected processing timeline. While recognizing the presence of fraudulent ERC claims and the need for the IRS to thoroughly review all claims, the Taxpayer Advocate also empathizes with legitimate businesses that are experiencing financial difficulties due to the prolonged delays in processing their genuine ERC claims.

Additional Steps Proposed by the IRS Commissioner to Counter Illegitimate ERC Claims

The IRS Commissioner has urged Congress to take decisive action by enacting legislation that equips the IRS with the essential tools to enhance its enforcement efforts against fraudulent claims. This proposed legislation encompasses three crucial elements that seek to preserve the integrity of the ERC program and guarantee the proper allocation of funds.

  • Banning ERC preparers from charging fees based on a percentage of the ERC claimed.  The IRS believes that contingency fees incentivize preparers to improperly inflate the amount of an ERC to which an employer is entitled. ERC preparers, however, argue that employers are unable to pay preparation fees up front and their contingency fees provide greater access to ERC claims.
  • Enabling the IRS to further penalize preparers of ineligible ERC claims. According to North Carolina Senator Thom Tillis, this would enable the IRS to penalize preparers from ERC “mills” who misinformed their customers by providing advice contrary to what the employers’ regular tax preparers advised.
  • Extending the statute of limitations on assessment for ERC claims filed in 2020 and the first two quarters of 2021 from three years to five years. Congress previously extended the statute of limitations on assessment for ERC claims filed in the third and fourth quarters of 2021 from three years to five years.

The Takeaway

The IRS is actively pursuing the enforcement of fraudulent ERC claims, showing their dedication to maintaining the integrity of the program. By extending the moratorium, the IRS not only has the opportunity to thoroughly review claims without issuing funds, but also allows taxpayers additional time to withdraw their claims if necessary. This combined effort, along with the implementation of the new Voluntary Disclosure Program, provides the IRS with a comprehensive process to identify and eliminate the most obviously illegitimate ERC claims.

Simultaneously, both the IRS and Congress express dissatisfaction with the current limitations on civil enforcement. By eliminating contingency fees, increasing penalties for promoters, and extending the statute of limitations on assessment, the IRS can effectively combat ERC noncompliance at its root, targeting promoters who intentionally prepare unqualified ERC claims. Furthermore, these measures provide the IRS with additional time to thoroughly investigate employers themselves. If potential legislation to terminate the ERC program is enacted, it will, at the very least, eliminate approximately 15 more months of ERC claims.

To summarize, it is anticipated that ERC enforcement will continue for a prolonged duration. If the IRS Commissioner has their way, the IRS will strengthen its enforcement abilities even further. It is advisable to seek guidance from professionals like Chiles Capital to optimize your ERCs and ensure compliance.