Understanding the ever-evolving tax laws can often feel like navigating a maze, especially for small business owners. With the recent pause on new Employee Retention Credit (ERC) applications by IRS, it’s normal to feel more perplexed than usual.
We get that- we’ve also had our fair share of head-scratching over complex tax credit rules and baffling regulations. And you’re not alone; there have been over 3.5 million ERC claims processed since its introduction under the Cares Act! Our upcoming blog post aims to slice through this confusion and offer a simple breakdown of why the IRS has hit ‘pause’ on processing these credits until 2024, and what exactly does it mean for your business.
Ready to unravel the mystery behind IRS’s latest curveball? Let’s dive right in!
Understanding the Employee Retention Credit Moratorium
The Employee Retention Credit (ERC) moratorium is part of a significant response by the IRS to address concerns around fraudulent claims. The rising number of bogus ERC requests has led to this temporary halt in processing new applications until at least 2024.
It’s essential for small business owners like us to understand how this impacts our businesses.
On a broader scale, the IRS Commissioner Danny Werfel had little choice but to institute this safeguard against unscrupulous actors exploiting pandemic-era tax credits. The credit was initially introduced under the Cares Act as an incentive for employers, including many small business owners, not to lay off workers during economic downturns caused by the pandemic.
However, aggressive promoters and marketing ne’er-do-wells took advantage of it for their gain leading to an alarming rise in fraudulent schemes prosecuted by the Justice Department.
These unlawful activities have now culminated in stricter compliance efforts from IRS Criminal Investigation (IRS-CI), with severe penalties or interest payments targeting scammers and those who aid them.
As unsettling as these changes may be, they are necessary steps towards ensuring that only legitimate taxpayers benefit from such financial aids while maintaining trust in our tax system.
IRS’s Temporary Pause on Employee Retention Credit Processing
The IRS has implemented a temporary pause on processing new employee retention credit applications, citing the need to address fraudulent claims and protect small businesses.
Reasons behind the pause
The sudden halt of Employee Retention Credit applications has been due to a number of crucial reasons.
- A significant surge in bogus ERC claims compelled the IRS to implement this temporary suspension, with fraudulent claims putting unwanted strain on the system and delaying legitimate requests.
- Unscrupulous actors and scammers have targeted small business owners, causing harm and unnecessary confusion.
- Aggressive marketing tactics by promoters of fraudulent claims have instigated this pause, intentionally misleading businesses into erroneous applications.
- IRS Commissioner Danny Werfel ordered the moratorium as a necessary response to protect taxpayers, lessen potential penalties or interest payments, and circumvent further compliance issues.
- The IRS is focusing more resources on audit work and criminal investigations into these potentially fraudulent activities, hence the need for a pause in processing new applications.
- The moratorium gives desperately needed time to the Justice Department for pursuing federal charges and convictions against those conducting tax scams.
- To ensure transparency and fairness within our tax system, this pause enables comprehensive compliance reviews before any potential resumption of application processing.
Impact on businesses
The suspension of the Employee Retention Credit (ERC) claims process has put a significant strain on businesses, especially small enterprises. Dealing with an already challenging economic climate due to the pandemic, many businesses are now faced with additional financial setbacks caused by this unexpected development.
The halt in processing threatens their survival and dampens any hope of swift recovery.
Not only is the IRS’s decision delaying legitimate ERC claims, but it also puts honest business owners at risk from unscrupulous actors trying to exploit the situation. Bogus ERC schemes have sprouted since news of the moratorium came out, promising quick access to funds — for a fee.
These predatory practices put cash-strapped businesses in even more precarious positions as they try to navigate through these uncertain times.
Plans to Aid Affected Businesses
The IRS is not leaving businesses in the lurch during the moratorium. They’re devising strategies to help those negatively impacted by aggressive Employee Retention Credit schemes. Here are some of their initiatives:
- The launch of information campaigns to increase awareness on the correct application process for ERC.
- The introduction of an audit process, focusing on identifying and curbing bogus ERC claims.
- Cooperation with Justice Department on conducting criminal investigations into cases of fraud tied to the ERC.
- Encouraging taxpayers to report suspected fraudulent activities for immediate attention and resolution.
- Strengthening compliance reviews to ensure proper adherence to tax laws.
- Sharing resources and essential information with trusted tax professionals aiding in valid claim submissions.
- Implementing contingency plans like fee waivers or extensions for those genuinely affected by the moratorium.
Extension for Certain Taxpayers Due to Natural Disasters
The IRS has announced an extension for certain taxpayers who have been affected by natural disasters. This extension allows eligible individuals, businesses, and self-employed individuals located in qualified disaster areas to have extra time to file their tax returns and make any required payments.
The extension is designed to provide relief for those who may have experienced disruptions or difficulties as a result of the natural disasters. It’s important for small business owners to be aware of this extension and take advantage of it if they qualify.
Expansion of Employee Retention Tax Credits
Despite the temporary halt, it’s important to understand that the Employee Retention Credit (ERC) has seen substantial expansion since its inception. Initiated by the Cares Act, the ERC was designed to encourage employers, particularly small businesses, to keep their staff employed during the early, uncertain days of the pandemic.
| Year | Description |
|---|---|
| 2020 | The ERC covered 50% of the first $10,000 in wages and health care costs per employee for eligible businesses impacted by COVID-19. |
| 2021 | The credit rate was increased to 70% of the first $10,000 in wages and health care costs per employee for each quarter in the year. The eligibility criteria were also expanded. |
However, the expansion of this credit, combined with aggressive marketing schemes, led to significant abuse. In fact, the IRS has received over 3.5 million ERC claims since its implementation. Regrettably, a large portion of these claims have been identified as fraudulent, negatively affecting legitimate businesses, delaying their claim payments and leading the IRS to issue warnings about ERC scams.
As a result, the IRS Commissioner, Danny Werfel, ordered an immediate moratorium on ERC claim processing. This pause is not just to stem the tide of fraudulent claims but also to protect small business owners from becoming victims of ERC-related scams. The moratorium will remain in effect until at least the end of 2023. We understand that this might have significant implications on your business, and we assure you that the IRS is actively looking into plans to aid businesses affected by this temporary halt.
Implications of the Moratorium on Small Businesses
The moratorium on employee retention credit (ERC) applications has significant implications for small businesses. The temporary pause in processing these claims until at least the end of 2023 is aimed at addressing the increasing number of questionable and fraudulent claims.
While this measure is intended to safeguard businesses from scams, it may cause delays in valid claim payments and impact small business owners who rely on the ERC to retain their employees during challenging times.
Aggressive marketing tactics promoting bogus ERC schemes not only hamper legitimate businesses but also contribute to longer waiting periods for funds that could provide much-needed support.
It’s crucial for small business owners to remain vigilant, seek guidance from trusted professionals, and be aware of eligibility rules to ensure compliance with tax laws while navigating these challenging circumstances.
Conclusion
The IRS has taken decisive action to combat fraudulent claims in the Employee Retention Credit program by implementing a moratorium on new applications until 2024. This temporary pause will allow the agency to focus on identifying and prosecuting scammers, protecting small businesses from being exploited.
By addressing these issues head-on, the IRS is ensuring that legitimate businesses can receive the support they need during these challenging times without delay or disruption.