ERC History and Eligibility
The ERC was first introduced in March 2020 via the Coronavirus Aid, Relief, and Economic Security (CARES) Act to help businesses retain and pay their employees during the COVID-19 pandemic, with employers originally eligible to receive the credit through 2021. Employers claiming the ERC were originally not allowed to also apply for Paycheck Protection Program (PPP) loans, another incentive for businesses introduced around the same time. However, the Consolidated Appropriations Act (CAA) later changed ERC eligibility in December 2020, including the allowance for PPP loan participants to also claim the ERC as long as they used wages not used for PPP loan forgiveness. The CAA also increased the 2021 maximum credit amount ($7,000 per quarter), reduced the 2021 reduction in gross receipts percentage to qualify (20 percent), and changed the threshold for qualifying as a 2021 large employer (500 average full-time employees). In March 2021, the American Rescue Plan Act (ARPA) extended the ERC through Dec. 31, 2021, and also made eligibility available for certain Recovery Startup businesses and those defined as severely financially distressed employers (SFDEs). Later in 2021, the Infrastructure Act terminated ERC for wages paid in the fourth quarter of 2021 for employers that were not Recovery Startup businesses.
With the potential of substantial payouts and limited CPA ERC resources, ERC promoters are charging 20-25 percent contingency fees, meaning there is considerable concern about these promoters taking advantage of those hoping to be eligible and file for the ERC. Additionally, the IRS has received approximately a whopping 3.6 million ERC claims – as of July 31, 2023, IRS Criminal Investigations has initiated 252 investigations, equaling $2.8 billion of potentially fraudulent ERC claims. Fifteen of the 252 investigations have resulted in federal charges.
IRS Moratorium and Withdrawal Option
In September 2023, the IRS announced a moratorium on processing ERC claims effective Sept. 14 until Dec. 31, 2023. No new claims will be processed, although previously submitted claims would still be processed. Since then, the IRS also announced a withdrawal option for the ERC. Withdrawing an amended return for an ERC claim means the IRS will treat it as if the return was never filed. Employers must meet all the following criteria to be able to use the withdrawal process for their ERC claim:
The ERC claim was made on an adjusted employment tax return (e.g., Form 941X).
The return was filed only to claim the ERC with no other adjustments included.
The employer must withdraw the full amount of the ERC credit.
The ERC claim has not yet been paid, or if it has been paid, the employer as not cashed the ERC refund check.
If an employer does not meet all the above criteria, an amended return must be filed to adjust their ERC claim.
ERC withdrawal consideration warranted, but not limited to, the following:
Eligibility Errors
- Gross receipts miscomputation
- Supply chain issues did not meet government mandate standards
- Filed as a recovery startup business but average gross receipts were greater than $1 million
Computation Errors
- Included 1099 contractors
- Included same wages for PPP forgiveness
- Filed as a recovery startup business but did not limit $50,000
Employers can withdraw their ERC claim by making a copy of their Form 941 and write “Withdrawn” in the left margin before printing and signing with their authorized name and date in the right margin. The form must then be faxed to the IRS (855-738-7609). If an employer has been selected for an ERC audit, the withdrawal should be sent directly to the identified IRS Agent or to the mailing address per the audit notice. Also, any uncashed ERC refund checks should be voided and mailed with the withdrawal request to the IRS. Further details can be found on the IRS’s website.
ERC Promoter Warning Signs
The following could be warning signs that you are dealing with an ERC promoter.
- Unsolicited calls or advertisements mentioning an “easy application process.”
- Statements that the promoter or company can determine ERC eligibility within minutes.
- Large upfront fees to claim the credit.
- Fees based on a percentage of the refund amount of ERC claimed.
- Aggressive claims from the promoter that the business receiving the solicitation qualifies before knowing the business’s tax situation.
- Suggestions from ERC marketers urging businesses to submit ERC claims because there is “nothing to lose.”
ERC Audits and Tips
The IRS has indicated that they will place a focus on ERC audits. Substantial documentation is required to show eligibility and accuracy for the ERC credit based on prior issued notices from the IRS, including:
- Specific quarters eligible for ERC
- Qualified wages verification
- ERC credit computation accuracy
- ERC limitations based on full-time employees
- Coordination with ERC and other COVID-19 benefits
Fraud indicators that the IRS looks for include the following:
- EIN obtained in 2020 and 2021
- No Form 941 filed prior to 2020
- No prior employment tax deposits made prior to ERC filing
- ERC claims filed with a residential vs business address
- No evidence of financial resources to pay large number of wages claimed for ERC
- Minimal to no public records evidencing business operations
- Form 7200 filed with no subsequent Form 941 reconciling the advance amount
- Form 941 filed but no income tax return
The statue of limitations on assessment for Forms 941 is as follows:
- 2020 – Three years, until April 15, 2024.
- Q1/Q2 2021 – Three years, until April 15, 2025.
- Q3/Q4 2021 – Five years, until April 15, 2027.
Possible penalties include, but are not limited to:
- 6662 – Accuracy related, 20 percent.
- 6663 – Civil fraud.
- 7207 – Fraudulent return, $10,000 ($50,000 corporations).
We anticipate that there’s more to come regarding the ERC. Guidelines for a settlement program are expected to be announced by the IRS later this month. ERC audits will be ongoing through 2027, which will be five years for some quarters, and legitimate claims may still be filed upon the conclusion of the moratorium.
In the meantime, an ERC Risk Assessment can help you determine whether you should consider an ERC withdrawal option, file another amended return, or rest easy with the claim you’ve already filed.
