Last week leaders in the Biden Administration and on Capitol Hill expressed increasing concerns with the Employee Retention Credit (ERC). While claim processing delays continue to frustrate many organizations, the Internal Revenue Service is signaling that ERC scrutiny is entering a “new phase” to battle erroneous filings.
The ERC is a refundable tax credit for organizations that kept employees on their payrolls despite government-forced suspensions of operations or significant declines in receipts during the COVID-19 crisis in 2020 and 2021. Employers could potentially claim thousands of dollars in assistance per retained employee, and many groups legitimately benefited from the credit. However, the availability of such significant amounts of cash also attracted fraudulent activity.
Speaking at a roundtable for tax professionals last week, IRS Commissioner Danny Werfel said, “The further we get from the pandemic, we believe the percentage of legitimate claims coming in is declining.”
Werfel warned organizations to be cautious. He called the level of misleading communication about the ERC “staggering.” In fact, the radio, TV, internet, and direct-mail ads touting the ERC as easy money have become so aggressive that such marketing was added to the agency’s annual “Dirty Dozen” tax scams earlier this year. The resulting deluge of questionable filings is causing problems for the IRS and tax professionals, not to mention those organizations making improper claims that could lead to onerous repayment requirements and additional penalties when detected by IRS compliance checks.
“A terrible scenario is unfolding that hurts everyone involved — except the promoters,” Werfel said.
Members of Congress are similarly wary of growing ERC challenges. The House Ways and Means Committee held a hearing last Thursday on the matter, and one witness, Roger Harris of tax firm Padgett Advisors, noted the relative ease of filing a claim with the help of questionable tax advisors. He warned, however, that the lack of documentation required by the government on the front end could leave an employer exposed and on the hook financially later if IRS investigators determine it improperly claimed the credit.
Republicans and Democrats have different views on who is responsible for the current ERC predicament. Chairman Jason Smith (R-Mo.) blamed the IRS for its slow work to process and provide clarity for claims. He said that fostered an environment conducive to dishonesty and fraud. Meanwhile, Rep. Bill Pascrell (D-N.J), the top Democrat on the panel’s Oversight Subcommittee, emphasized the need for sufficient resources (which he believes Republicans wish to undercut) to allow IRS agents to process legitimate claims and deal with improper ones.
Looking ahead, Oversight Subcommittee Chairman David Schweikert (R-Ariz) expressed a desire to eliminate the ongoing claims backlog, combat scams, and evaluate processes to prevent problems in the future. He also emphasized that Congress didn’t intend the ERC to be “a line of capital years after the COVID-19 pandemic ended.” Perhaps significantly, IRS Commissioner Werfel similarly pointed to a need for legislation during his own remarks last week. Ideas he floated included shortening the window for claims to be filed and allowing increased IRS oversight over return preparers.
The IRS has been regularly updating its FAQ webpage on the ERC for those looking for information regarding properly claiming the credit.
ECFA will continue to monitor ERC developments at the IRS and on Capitol Hill. We also encourage members to review our recent webinar titled “The Employee Retention Credit – The Good, the Bad, and the Ugly” featuring leading nonprofit CPAs Mike Batts and Kaylyn Varnum.
“Making a claim for a very large cash benefit from the federal government under penalty of perjury is serious business,” Batts said earlier this year. “I expect that a large part of the IRS’s job over the next several years will be to pursue improper ERC claims.”
“The results are likely to be staggering,” he declared.