Update as of 6th December, 2023
After an initial review, the IRS has determined that more than 20,000 claimants of ERTC did not meet the two basic criteria mentioned here, for claiming the ERTC:
- Claimant entity was not in existence during period of eligibility
- There are no paid employees during the period of eligibility
To resolve this, the IRS is sending letters of disallowance (Letter 105 C, Claim Disallowed) to such ineligible ERTC claimants.
Taxpayers who disagree with the disallowance can provide documentation supporting their claim or can file an administrative appeal.
IRS has paused the processing of new claims by declaring a moratorium
until at least the end of 2023
The IRS has been overwhelmed with ineligible and faulty ERTC claims in recent months. These claims are likely filed by promoters who continue to aggressively push businesses to apply regardless of the eligibility rules. As a remedy, the IRS has paused the processing of new claims by declaring a moratorium until at least the end of the year. During this time, the IRS will add safeguards to protect honest small business owners from ERTC-related scams.
| Situation | IRS stand | |
|---|---|---|
| A | New ERTC claims from 9/14/23 | Will be accepted by IRS; however, will not be processed until at least 12/31/2023 |
| B | ERTC claims already filed up to 9/14/23 | 1. Are being processed by IRS; however, the expected processing time is 180 days or more. (earlier 90-180 days) 2. Option given by IRS to the claimant to amend or withdraw the claims if believed to be incorrect or ineligible. |
| C | ERTC refund already received by the claimant, and the claimant now has a reason to believe that it is erroneous | 1. Option given by IRS to return the refund check if not yet encashed. 2. IRS will come up with an option to repay the encashed claims to the IRS shortly. |
Settlement and withdrawal program for erroneous claims:
Anyone who improperly claims the ERTC must pay it back, possibly with penalties and interest. The IRS is developing new initiatives to help businesses who found themselves victims of aggressive promoters. The IRS is developing a settlement program for repayments for those who received an improper ERTC payment, as well as a special withdrawal option for those who filed an ERTC claim that has not been processed (explained below).
What can you do now?
- 1. If you have not yet submitted your claim and want to submit it:You can go ahead and file your ERTC claim without being afraid of the moratorium. Although, keep in mind that your application won’t be processed before the end of the year. You should get help from a trusted tax professional – not a tax promoter or marketing firm. The new question-and-answer guide by the IRS can help. Keep robust documentation ready for the claim, as the IRS may also seek additional documentation from the taxpayer to ensure it is a legitimate claim. Make all efforts to ensure your claim is valid and eligible as per IRS rules.
- 2. If you have already submitted your claim and believe it to be a legitimate claim: You need to prepare for a possible IRS scrutiny. For each quarter you claimed the credit, keep the documentation ready to explain your ERTC credit claim. This could include financial reports, IRS returns, emails, or any other relevant evidence.
- 3. If you have already submitted your claim and believe it to be an erroneous claim:
- If a business claimed the ERTC earlier and the claim has not been processed or paid by the IRS, they can withdraw or amend the claim.
- If you haven’t received a refund and you’ve been notified that your claim is under audit, keep your withdrawal / amended return ready to communicate with your examiner.
- If you have received a refund check but haven’t cashed or deposited it, mail the withdrawal request along with the check (marked as Void) to the IRS.
- You have received a refund check AND encashed it, stay tuned. The IRS will be providing additional details to allow businesses to repay such ERTC claims shortly. This settlement program will allow businesses to avoid penalties and future compliance actions.
Disclaimer: Note that for all these options, the IRS has laid down detailed procedures.
Here is the link from the IRS website: To protect taxpayers from scams, IRS orders immediate stop to new Employee Retention Credit processing amid a surge of questionable claims; concerns from tax pros | Internal Revenue Service
- 4. If you have not claimed ERTC but filed an amended 941-X: Expect delay. All ERTC claims are filed through 941-X. It is not possible to know whether an amended 941-x includes ERTC claim or not. This might impact the processing of your amended 941-x without ERTC claim.
Source and useful links:
Red flags to watch out for: Red flags for Employee Retention Credit claims; IRS reminds businesses to watch out for warning signs of aggressive promotion that can mislead people into making improper ERTC claims | Internal Revenue Service
Question and Answer guide to understand your eligibility: Employee Retention Credit Eligibility Checklist: Help understanding this complex credit | Internal Revenue Service (irs.gov)
Guidance for a correct ERTC claim:
1. Keep robust documentation ready: In general, you need to keep ready the records you relied on to claim your ERTC. Here are some examples:
- The specific government order causing the business operations to be suspended.
- Financial Reports showing the required decline in gross receipts.
- Record of employees receiving qualified wages and specific amounts.
- Method of allocation of qualified health plan expenses.
- Impact of Paycheck Protection Program loan forgiveness on your ERTC claim
- Any completed Forms 7200 that you submitted to the IRS and any completed federal employment and income tax returns related to your claim for ERTC.
2. Work with a trusted tax professional:
- Obtain a detailed worksheet from the professional explaining ERTC eligibility and the computations used to determine the ERTC amount.
- Don't apply unless you believe you are legitimately qualified for this credit.
- Go through the IRS Question and Answer guide: Employee Retention Credit Eligibility Checklist: Help understanding this complex credit | Internal Revenue Service (irs.gov)
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