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"It’s Your Money and You Need It Now: ERC Refund Anyone?," Daily Report

September 23, 2024

Atlanta-Based Senior Associate Jerrika Anderson published in the Daily Report

For many businesses grappling with financial strain in the aftermath of the COVID-19 pandemic, the Employee Retention Credit (ERC) has been a tremendous lifeline. This refundable tax credit aimed to incentivize businesses that either faced government-mandated shutdowns or experienced significant declines in gross receipts during 2020 and2021 to keep employees on their payrolls.

While the ERC’s primary goal was to incentivize businesses to retain employees amid unprecedented challenges, the process of applying for and receiving the credit (which often involves tax refund claims) has not been without its complications and controversies. Fraudulent claims and aggressive marketing tactics by those promoting entitlement to these credits have led to significant scrutiny and enforcement efforts by the IRS pushing back on a sizable number of claims and delaying the refund process for validly filed claims.

Warning Signs for ERC Ineligibility

On July 26, the IRS identified several warning signs that may indicate a business’s ineligibility for the ERC. These include:

  • Essential Businesses: Businesses classified as essential that could operate fully without a decline in gross receipts may not qualify.
  • Government Orders: Businesses must demonstrate how government orders fully or partially suspended their operations. Inadequate documentation of this suspension may lead to disqualification.
  • Family Member Wages: Claims involving wages paid to family members may be scrutinized, as these may not meet ERC eligibility criteria.
  • PPP Loan Forgiveness: Wages claimed for ERC cannot overlap with those used for Paycheck Protection Program (PPP) loan forgiveness.
  • Employee Services: Large employers claiming ERC for employees who continued to provide services during the pandemic may face scrutiny.

Continued Compliance Efforts

The IRS’s battle against ERC fraud is far from over. The agency’s compliance efforts remain robust, encompassing a variety of initiatives designed to root out improper claims and promote transparency:

  • ERC Claim Withdrawal Program: The IRS has facilitated a claim withdrawal process for unprocessed ERC claims. As a result, over 7,300 entities have voluntarily withdrawn claims totaling $677 million.
  • ERC Voluntary Disclosure Program: The Voluntary Disclosure Program (VDP) allows ERC recipients to come forward and disclose their claims. The IRS received more than 2,600 applications through this program, revealing credits worth $1.09 billion. Currently, VDP is open through Nov. 22, 2024, for 2021 tax periods.
  • Criminal Investigations: As of July 1, IRS Criminal Investigation has initiated 460 criminal cases related to potentially fraudulent ERC claims, with an estimated total value nearing $7 billion. Out of these investigations, 37 have led to federal charges, 17 have resulted in convictions, and nine have concluded with sentences averaging 20 months.
  • Promoter Investigations: The IRS is actively investigating abusive tax promoters and preparers who have misrepresented the eligibility criteria for the ERC. The Office of Promoter Investigations has received hundreds of referrals, both internally and externally, and will continue its enforcement actions against those engaged in deceptive practices.
  • Audits: Thousands of ERC claims are currently under audit. The IRS’s scrutiny aims to ensure that only eligible businesses receive the credit, reinforcing the integrity of the program.

The Recent Moratorium and Its Implications

In response to widespread fraudulent claims and aggressive marketing tactics by some promoters, the IRS placed a temporary moratorium on processing ERC claims filed after September 14, 2023. This pause allowed the IRS to implement additional safeguards to prevent ineligible businesses from receiving refunds and to combat deceptive practices.

On Aug. 8, the IRS announced that it would resume processing ERC claims from the new moratorium period, which covers claims filed between Sept. 14, 2023, and Jan. 31, 2024. The IRS will prioritize claims based on risk, starting with those deemed highest and lowest risk. This means that while some businesses may see their claims processed sooner, others may face delays.

Refund Litigation

For businesses struggling with financial difficulties, this processing delay can be particularly stressful. If your business has a legitimate ERC claim and is awaiting payment, refund litigation may be right for you.  The Internal Revenue Code allows taxpayers to file refund suits if their claims remain unpaid for at least six months from the filing date, provided they have not received a notice of disallowance. Businesses can file suits in the U.S. district court where their principal place of business is located or in the Court of Federal Claims.

Filing a refund suit can be a strategic move for businesses with strong documentation supporting their ERC eligibility. This is especially true for businesses that qualified for ERC under the more straightforward gross receipts test and filed amended income tax returns to reduce their wage expense. While litigation involves costs, some law firms may offer contingency fees or alternative fee arrangements. In successful cases, businesses may also recover part or all of their legal expenses. For companies in good financial standing, continuing to wait for the IRS to process their claims might be a viable option, especially since claims accrue interest at 8% per year during the processing delay.

Conclusion

The ERC remains a vital tool for businesses that met the eligibility requirements and maintained robust documentation. As the IRS continues its efforts to combat fraud and streamline processing, businesses that have legitimately qualified for the ERC should stay informed about developments and take appropriate actions to secure their refunds. The landscape of ERC claims is evolving, and staying proactive will be key to successfully navigating the remaining challenges.

The ongoing scrutiny and enforcement actions underscore the importance of ensuring that claims are accurate and compliant with IRS guidelines. Businesses should carefully review their eligibility, consider their refund options and consult with trusted tax professionals to navigate the complexities of the ERC process effectively.  If your business rightfully claimed the ERC, it truly is your money and you should act to make sure you receive it now, if you have not already done so.

Jerrika Anderson is a senior associate and member of the Tax Controversy & Litigation Group and the Tax Group, based in the Atlanta office of Chamberlain, Hrdlicka, White, Williams & Aughtry. She is a former senior trial attorney with the IRS Office of Chief Counsel and specializes in tax, federal and state tax controversies and investigations. 

Reprinted with permission from the September 20, 2024 edition of Daily Report © 2024 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com.