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IRS Halts Processing of New ERC Claims: What You Need to Know

The IRS recently made a surprising announcement that has left many individuals and businesses concerned. They have temporarily halted the processing of new Employee Retention Credit (ERC) claims. The ERC was introduced as part of the CARES Act in March 2020 to assist businesses in retaining employees during the pandemic. It provided eligible employers with a refundable tax credit based on qualified wages paid to employees, capped at $26,000 per employee.

Several factors led to the IRS’s decision to pause new ERC claim processing:
  1. Overwhelming Demand: The ERC program has attracted an enormous number of applicants due to its attractive incentive of up to $26,000 per employee. This surge in demand has overwhelmed the IRS, causing significant processing delays and backlogs.
  2. Resource Constraints: The IRS has been grappling with resource constraints, including staff shortages and technological limitations. While the recent allocation of nearly $80 billion in funding through the Inflation Reduction Act is a step in the right direction, it will take time to hire and train new personnel, update processes, and deploy new technology.
  3. High Occurrence of Fraud: A major factor contributing to the decision to halt processing new ERC claims is the prevalence of fraudulent applications. Unscrupulous individuals and businesses have exploited the program’s complexity and the IRS’s backlog to submit fraudulent claims, diverting funds intended for legitimate applicants.

For those who were relying on ERC, it’s important to note that the temporary halt in processing new claims does not affect previously approved claims or payments. If you’ve already received ERC benefits, those will continue as expected.

If you were planning to apply for ERC benefits or are waiting for your claims to be processed, it’s crucial to stay updated on IRS announcements and guidance. The IRS’s pause aims to allow them to catch up on the backlog, streamline processes, and address the issue of fraudulent claims.

This decision to pause new ERC claims underscores the necessity for a thorough review and adjustment of the program to ensure the equitable and efficient distribution of relief funds. As we await further updates from the IRS, it is vital for businesses and individuals to remain vigilant and consult with tax professionals for guidance in this evolving situation.

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ERC credit
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The Risks of ERC Mills and Deceptive Marketing Tactics

In response to the economic challenges posed by the COVID-19 pandemic, the U.S. government introduced several relief measures to support struggling businesses and individuals. One such lifeline was the Employee Retention Credit (ERC). However, this well-intentioned program unwittingly spawned a perilous phenomenon known as ERC mills.

ERC Mills: The Dark Side of Relief

ERC mills, be they individuals or businesses, exploit the ERC program by helping others in filing multiple, erroneous, or fraudulent claims. Frequently, they expedite the process, sidestepping verification and compliance checks. They charge hefty fees while making promises of substantial tax refunds.

ERC mills often take shortcuts, causing businesses to file claims they don’t actually qualify for. This not only puts the legitimacy of the claim at risk but can also lead to hefty penalties down the road.

The IRS is keeping a close eye on ERC claims due to the rise in fraudulent activity. In fact, their concern has risen to the point that last week they put a pause on accepting any new ERC applications. The pause will allow them to devote resources to closer examination of the approximately 600,000 claims that have been filed within the last few months but not yet processed.

Consequences of Filing a False ERC Claim

Filing a fraudulent ERC claim, whether intentional or not, has serious consequences. Ignorance offers no immunity from these repercussions. ERC mills typically shield themselves of responsibility, asserting in their contracts that they merely complete forms based on provided documentation, even if they never requested or required such documentation.

Legal Consequences: Filing a false claim is a federal offense, potentially leading to criminal charges, fines, and possibly jail time. The business is liable for every return and form filed with the IRS.

Paying it Back and Penalties: If the IRS detects an incorrect ERC claim, your business must repay the funds with interest. This includes the amounts the business paid to the ERC mill. Penalties may also be imposed.

Loss of Tax Benefits: In addition to repaying ERC funds, your business may lose eligibility for other tax credits and deductions, increasing your overall tax bill.

Audit Exposure: A phony claim can trigger an IRS audit, a stressful, expensive, and intrusive process. Even if your intentions were honest, you might face an audit due to ERC mill mistakes.

The Employee Retention Credit was meant to provide financial relief during tough times. However, the risks of ERC Mills and deceptive marketing tactics warrant businesses to exercise caution, meeting all eligibility criteria before pursuing ERC credits. The fallout from engaging with ERC mills or filing fake claims can be financially and legally devastating. To navigate these challenging times without falling into the fraud trap, partner with a reputable tax professional to evaluate whether you qualify for the credit and prepare and file your application.

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