Episode 249 – The IRS recently announced a moratorium on the popular Employee Retention Credit (ERC) tax program. What happens now?

Hello this is Bill Rainaldi, with another edition of Security Mutual’s SML Planning Minute. In today’s episode, the IRS has put a moratorium on a popular tax program until at least next year.

The IRS announced in mid-September that it is stopping the processing of new claims for the previously well-received Employee Retention Credit, or ERC. This comes after what it says is a surge of questionable claims.[1]

The ERC is a government program created in 2020 as a response to the COVID-19 pandemic and the brief economic shutdown that resulted. It provides companies and small businesses with a refundable tax credit for maintaining their payroll. Its purpose was to encourage companies to keep people employed during the height of the pandemic.

The ERC rules are complex, and in fact, were amended shortly after they were first issued in March 2020. Businesses can apply for a generous tax credit: 70% of qualified wages up to a $10,000 limit, per quarter, for wages paid in 2020 and 2021. So, the maximum is $7,000 per employee per quarter. Despite the end of the program, businesses can still claim the ERC for up to three years retroactively.

In order to qualify for 2021, the employer must show that they experienced a decline in gross receipts by 80 percent compared to the same time period in 2019 or 2020.

There are other limitations. Self-employed individuals cannot claim the ERC for their own wages or for specific individuals who are related to them.

Note that the ERC is not a loan. It is a tax credit based on payroll taxes employers previously paid. And the credit is refundable. This is an important consideration for many small businesses. It means that if the credit is greater than the employer’s tax liability for a given year, they can keep the difference.

The program has been incredibly popular, going so far as to generate a barrage of advertisements from private companies offering help with the filing process. This may be part of what caused the recent action by the IRS.

According to the IRS announcement, “a substantial share of new claims from the aging program are ineligible and increasingly putting businesses at financial risk by being pressured and scammed by aggressive promoters and marketing.”1 The agency had previously announced that they were taking a more detailed look at these claims for compliance concerns, including more audit work and criminal investigations on promoters and businesses filing what they believe are dubious claims.

Note that any claim received by the IRS prior to September 14 will continue to be processed, but at a slower pace.

[1] IRS. “To protect taxpayers from scams, IRS orders immediate stop to new Employee Retention Credit processing amid surge of questionable claims; concerns from tax pros.”  IR-2023-169, Sept. 14, 2023. Irs.gov https://www.irs.gov/newsroom/to-protect-taxpayers-from-scams-irs-orders-immediate-stop-to-new-employee-retention-credit-processing-amid-surge-of-questionable-claims-concerns-from-tax-pros (accessed September 22, 2023)

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