First GLAM, and now Slam: the IRS is getting serious with questionable Employee Retention Credit (ERC) claims.
GLAM
On July 21, 2023, the IRS issued a GLAM (Generic Legal Advice Memorandum) that essentially removed supply chain disruption as an argument to qualify for the ERC under the “government order” provision. This GLAM spelled out in five detailed scenarios why the supply chain argument would not withstand IRS muster, and thus closed a path many third-party providers (referred by the IRS as “ERC mills”) had exploited in pushing ERC refund claims on many unsuspecting employers.
SLAM
But ERC claims continued to flood the IRS, many of which the IRS believes are frivolous or fraudulent. On September 14, 2023, the IRS slammed the door on processing ERC claims. The IRS announced “an immediate moratorium through at least the end of the year on processing new claims for the pandemic-era relief program to protect honest small business owners from scams.” The IRS announcement goes on to state:
“IRS Commissioner Danny Werfel ordered the immediate moratorium, beginning today, to run through at least Dec. 31 following growing concerns inside the tax agency, from tax professionals as well as media reports that a substantial share of new claims from the aging program are ineligible and increasingly putting businesses at financial risk by being pressured and scammed by aggressive promoters and marketing.”
The IRS realizes there are legitimate ERC claims that have been filed and are awaiting processing, but these are being drowned out by the flood of unscrupulous ERC claims from third-party promoters, many of whom receive large contingent fees from an ERC claim. The IRS has alerted businesses over the past year, but the surge of ERC claims continued to swamp the IRS. So, the IRS hit the pause button and suspended the processing of new ERC claims. IRS Commissioner Danny Werfel issued a response as to why the ERC moratorium was issued.
Werfel notes that the IRS was becoming increasingly concerned that many small businesses were being targeted by aggressive third-party ERC providers with ineligible and unsupported ERC claims. He also claims that misleading marketing efforts by these ERC providers were not only hurtful to many small businesses and their owners, but also disrupted the processing of legitimate ERC claims. Werfel encourages impacted small businesses to pause their ERC process and seek advice from a trusted tax professional to avoid situations down the road where they might end up being forced to repay an ERC claim with penalties.
Next Steps
What should a business do during this ERC moratorium? This depends in part on where the business is in the ERC claim process. Some of the steps identified below are being worked out now by the IRS, and more details are expected in the coming weeks. The IRS offers the following:
A. For Those Currently Awaiting an ERC Claim. For businesses with an ERC claim on file with the IRS, the IRS will go on processing these claims, but at a reduced pace. The processing period could be pushed out to 180 days or more, according to the IRS to assure that the ERC claims are legitimate.
For those with an ERC claim pending, the IRS offers another option worth considering.
B. Withdraw an Existing Claim for Businesses that have Already Filed. For those with a pending ERC claim, they should carefully analyze the ERC guidance with a trusted tax professional. A new IRS question and answer guide is available . If the business claimed the ERC, but the claim has not been paid or processed yet by the IRS, their ERC claim can be withdrawn if they now feel it was wrongly filed. This option will allow taxpayers to avoid possible repayment issues and paying promoters’ contingency fees. The IRS indicates it plans to issue more details on this withdrawal option soon.
C. Wait for the IRS ERC Settlement Program to be Finalized. If a business previously filed an ERC claim that was processed by the IRS and the refund was received, but now it has determined the ERC was received improperly, the IRS will soon announce another option. The IRS will release a plan this fall that will permit a business to repay its ERC refunds and avoid penalties and other IRS sanctions. The IRS further noted that it is studying how a business could address the contingent fee it paid a third-party promoter.
D. For Those who have not Filed an ERC Claim Yet, Consider Reviewing the Guidelines and Waiting to File. For businesses still evaluating whether to submit an ERC claim, the IRS recommends businesses first diligently analyze the ERC guidelines in the moratorium period. The IRS further encourages businesses “to talk to a trusted tax professional – not a tax promoter or marketing firm looking to make money generating applications that takes a big chunk out of the ERC claim.” The above-noted new IRS ERC question and answer guide should be reviewed closely.
IRS Identifies "Red Flags" for Businesses To watch out for with Third-Party ERC Providers
For those still contemplating filing for ERC, the IRS warns businesses about aggressive ERC promoters. The IRS also released on September 14, 2023, a list of red flags that businesses should keep in mind when dealing with third-party ERC providers.
Concluding Remarks
There will be much to consider in this cooling off period with the moratorium in place. All businesses should evaluate their ERC situation and develop an ERC game plan. Whether your business has filed and received an ERC refund, is waiting for its ERC claim to be processed, or is still determining if it’ll qualify for the ERC, it’s important to proceed with caution. The IRS understands that many businesses feel conflicted over the ERC and aims to develop several other options. As noted above, the IRS urges businesses to avoid dealing with aggressive third-party ERC providers and instead seek counsel from a trusted tax professional.
Sikich is available to assist you in this process, so please contact your Sikich advisor to review your ERC situation and answer questions you may have.
About our Authors
Tom Bayer
Thomas Bayer, CPA, CExP, is the market lead for the Indianapolis, Indiana region. He has 30 years of experience providing a broad range of accounting, tax and business advisory services to commercial clients across various industries.
Debbie Warden
Debbie Warden, CPA, is a tax director with more than 25 years of experience providing tax and accounting services to businesses and individuals with special attention to minimizing tax liabilities through tax planning, including tax credits and other incentives. Her background in both public accounting and industry gives her insight into the challenges faced by businesses and the strategies available to overcome them.
Glen Birnbaum
Glen Birnbaum, CPA, ABV, ASA, CVA, CM&AA, is a partner with over 20 years of experience valuing closely held businesses. Glen provides expert accounting and tax advisory services for a range of entities, including those in the agriculture, manufacturing and construction industries. He excels in delivering tax and succession planning services to his clients, who value his commitment to strengthening their businesses.
Jim Brandenburg
Jim Brandenburg, CPA, MST, is a partner with extensive experience and knowledge in corporate and partnership tax law, mergers and acquisitions and tax legislation. His expertise includes working with owners of closely held businesses to identify tax planning opportunities and assist them in implementing these strategies.
