September 14th was a big day in ERC world. The IRS released an announcement that they would be halting the processing of new claims through at least the end of 2023. IRS Commissioner Werfel had been hinting that some action like this would be forthcoming once the backlog was reduced, so this wasn’t exactly a surprise.
However, many of our clients that are currently in the process of filing are worried about what this means for their Credit, understandably. So let’s take a closer look at what the recent announcements mean for the future of ERC.
The primary concern at the IRS is aggressive promoters of the Credit – we’ve all seen the commercials by this point. These companies are primarily made up of salespeople with an “every business qualifies” mentality. They will do whatever they can to convince you that your business qualifies and anyone who cautions you otherwise just doesn’t know what they’re talking about. These ERC firms have been around since the Credit was enacted, but the industry has exploded in 2023.
It has finally gotten to the point where the IRS can no longer ignore that the vast majority of claims are being prepared by these companies, almost all of which charge a percentage of the Credit as their fee. These fees range from 15 to 30 percent of the overall Credit. The issue with a fee based on the Credit amount is that it encourages companies to push the limits of what truly qualifies. The IRS now believes that the majority (some estimates are 90% or more) of incoming credits are for companies that don’t qualify. The most common methodology for qualification is a partial suspension based on supply chain issues, which the IRS has basically debunked with recent releases.
So, we’ve covered the why, now let’s focus on what’s next. Per the announcement on September 14th, the IRS states that all claims currently in the queue (600,000 per IRS estimates) will continue to be processed, but processing times may slow to 180 days as they institute increased review measures. They also may begin requesting certain information up front prior to releasing the refunds. We covered what information you should have prepared in case of an ERC audit here, and you should continue to have all of this information available prior to submitting claims.
For those that have yet to submit a claim, the IRS suggests reviewing the guidelines and making sure you qualify before submitting the claim. Companies should’ve been doing this from the start, but again, the focus is on these ERC companies who don’t exactly care whether the business qualifies or not. The IRS goes out of their way to call out supply chain arguments, stating “the IRS is seeing repeated instances of people improperly citing supply chain issues as a basis for an ERC claim when a business with those issues will very rarely meet the eligibility criteria”.
If you already submitted a claim and you’re unsure if you actually qualified, we recommend speaking with a tax professional that is familiar with ERC. If you filled out a questionnaire from an ERC firm that determined you qualified because of “supply chain constraints”, chances are you don’t qualify under those provisions. That doesn’t mean you don’t qualify for certain periods or under different provisions, but now is the time to take a second look. The IRS is in the process of creating an ERC settlement program where you can repay the refund you received and avoid penalties, so they recommend waiting on any repayment action until this is finalized.
We will continue to monitor any further updates or status changes to the program. For now, if you are working through your credit, there’s no reason to not submit under a valid qualification. If you are in the process of filing with an ERC firm, or have previously filed, please reach out with any questions you have in regard to whether your claim is legitimate or not.
For more information about the ERC, reach out to us today.
