ERTC Update: IRS Red Flags the Employee Retention Tax Credit

In the last year, the IRS has issued many news alerts discussing the concern over fraudulent claims and specialty tax credit firms preparing Employee Retention Tax Credit (ERTC) claims. They have found many are misleading employers regarding credit qualification, taking great liberties in interpreting the guidance and legislation, and charging significant contingent fees to prepare the claims.

The IRS is investigating over 250 potentially fraudulent claims with nearly $3 billion in refund claims. Several have come to federal charges, some of which have resulted in convictions. In their words, “The IRS sees wildly aggressive suggestions from marketers urging businesses to submit the claim because there is nothing to lose. In reality, those improperly receiving the credit could have to repay the credit – along with substantial interest and penalties”.

The IRS notes that some red flags include aggressive marketing with unsolicited calls, mailings, and online presence, which leave out key details such as PPP loan implications and supply chain qualification requirements of a government-ordered shutdown. Many charge hefty upfront fees that are contingent on the credit. Some even promise “qualification in minutes” and promise significant credit without having any detailed information on the business payroll.

The Impact of ERTC on Businesses and Taxpayers

The IRS has struggled with timely processing and refunding the ERTC claims due to the sheer volume of claims versus adequately trained personnel. They have also been challenged with determining valid vs. fraudulent claims. Part of the problem is the request for a claim is completed on Form 941X, which requires no detail of the calculation or verification of the qualification, making it difficult to assess validity. They feel many valid claims have already been processed and are concerned the outliers are now arriving due to the aggressive market mentioned above.

To reduce the number of fraudulent claims on September 14, 2023, the IRS issued IR-2023-170, putting a “Red Flag” on the ERTC and issuing a hold on processing any claims received after that date until at least the beginning of 2024. Additionally, the IRS increased the expected processing time to 180 days once they start reviewing and processing new claims and expectations for increased scrutiny of the claims.

What this means for you:

• If you filed a valid claim, there is nothing to do now. Valid claims will eventually get processed; however, there will be increased processing time and potentially additional information requests to prove validity.
• If you feel you have a valid claim, continue the process with a trusted tax professional.
• Suppose you have concerns that you may have filed an invalid claim. In that case, you should contact the provider, get detailed documentation of the calculations and qualifications used, and evaluate that against the IRS guidance.

If you feel you have filed an invalid claim based on bad information from a promoter, the IRS is working on a process to withdraw the claim and repay the funds. It is still being determined if that will include a penalty or interest abatement.

What qualifies you for ERTC:

• A reduction in gross revenue from 2019 compared to 2020 and 2021.
• Full or partial Government required shutdown.
• Supply chain interruption caused by a government-required shutdown of the supplier.

If you would like an evaluation of your qualification for the ERTC or have a concern that you may have filed an invalid claim and would like a second opinion, please contact me, Kelly Chambers, or watch our on-demand webinar Claiming ERTC: Credit Alert for Employers.