IRS Makes a Mess of the ERC—What to Do Now?

In its e-News for Tax Professionals dated September 15, 2023, the IRS published these articles on the Employee Retention Credit:

• IRS orders immediate stop to new ERC processing amid surge of questionable claims, concerns from tax pros
• Client not convinced they’re ineligible for Employee Retention Credit? New IRS Q&A document may help
• Beware of warning signs of aggressive promotions that can mislead businesses into improper ERC claims
• IRS looks to hire 3,700 employees nationwide to help expand compliance for large corporations, complex partnerships

Key point. The IRS barrage of negative information and intimidation scares many tax professionals and business owners. But here’s the deal: don’t be afraid of legitimate ERC claims.

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Unfair Stop to Processing New ERC Claims

The IRS has pinpointed a surge in improper ERC claims as the core issue. While numerous tax experts and associations commend the IRS for halting its ERC claim processing, we disagree with this approach.

We firmly believe that all valid claims should be addressed immediately, especially to assist businesses that have faced, and continue to face, financial hardships.

To clarify, the IRS announced a temporary halt on processing new ERC claims until after the end of this year at the very least.

But does this mean you shouldn’t submit your ERC claims? Absolutely not. It’s essential to note that 2020 ERC claims need to be submitted by April 15, 2024—a deadline that’s fast approaching.

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Although the IRS might not address your claim until after 2023 concludes, it’s crucial to submit it now and secure your place near the front of the line.

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Slowdown in Processing of Existing Claims

The IRS has more than 600,000 ERC claims in its processing queue.

Instead of its standard processing goal of 90 days for the claims in process, the new goal is 180 days—and much longer if the claim needs further review or audit.

Two points here:

1. If your ERC claim is legitimate, be patient. Also, make sure you have the documents to back up your claim. Frankly, you should have had the documentation before you filed for the ERC.
2. If your ERC is not legitimate, review the possibilities in IR-2023-169 and discuss them with your tax professional.

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New IRS Q&A Document

Before we get to the new Q&A document, let’s examine its headline—we bolded what we think are problems with the headline: “Client not convinced they’re ineligible for Employee Retention Credit? New IRS Q&A document may help.”

Really? How negative can you get? Here’s the IRS giving your tax professional a tool to convince you that you don’t qualify for the ERC.

This is all wrong. The IRS should provide clear guidance on qualification and non-qualification. After all, the IRS’s mission in life is to help you pay the proper tax, no more, no less. It’s not to intimidate you and your tax professional.

To see the new IRS checklist, click here.

In addition to the IRS checklist, review the following two articles:

• It’s Not Too Late: Qualify Now for Your 2020 and 2021 ERC Money
• Answers to 12 Employee Retention Credit (ERC) Questions

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IRS Tells You to Watch Out for Red Flags

The ERC is a legitimate tax credit. But the IRS notes that as time passes, the credit has been increasingly the target of aggressive marketing to businesses that may not qualify for the credit.

In a September 14, 2023, news release, the IRS warns businesses to beware of nefarious actors who improperly assist businesses in claiming credits for which they don’t qualify.

In the press release and in other press releases, the IRS pushes for you to report bad actors and claim a reward.

But the IRS is correct in that you need to beware. Say your promoter helps you file for a $1 million credit, and you pay the promoter 25 percent ($250,000). Say next, the IRS disallows your claim. You could be out the $250,000 fee you paid the promoter.

Rule of thumb. Make sure your claim is valid.

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IRS Hiring 3,700 New Employees, Primarily for Audits

In this hiring effort, and somewhat under the radar, is the fact that the IRS wants this new audit workforce to examine high-income earners, partnerships, large corporations, and promoters.

On the promoter front, the IRS wants to examine promoters aggressively peddling abusive schemes.

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Takeaways

Immediate halt on ERC processing. Due to a surge in questionable claims, the IRS has put an immediate stop to new ERC processing, at least until the end of 2023. But businesses with legitimate claims should file now to secure their place near the front of the line.

Delays in current claims. The IRS has a backlog of over 600,000 ERC claims. The new target for processing these claims is 180 days, doubled from the original 90 days. If claims are subject to further review or audit, the processing time could extend even further.

Documents. Businesses should ensure they have proper documentation to validate their ERC claims.

New Q&A chart. The IRS released a Q&A document, with an arguably negative tone, aiming to assist tax professionals in convincing their clients they are ineligible for the ERC.

Beware of aggressive promotions. The IRS warns businesses against aggressive promotions misleading them into improper ERC claims.

Hiring for compliance and audits. The IRS is looking to hire 3,700 new employees, with a significant focus on auditing high-income earners, large entities, and promoters, particularly those promoters aggressively pushing questionable schemes.

In summary, while the IRS’s recent actions regarding the ERC might appear intimidating, businesses should not be deterred from making legitimate claims. Proper documentation, due diligence, and caution against misleading promotions are crucial.

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