IRS Enforcement News Alert: Employee Retention Credit (“ERC”) Claims

Businesses and taxpayers should be aware that the IRS has hit the pause button on its Employee Retention Credit (“ERC”) program and is increasing its processing time of claims already received, due to mounting concerns of “unscrupulous” behavior. The moratorium on processing new claims began on September 14, 2023, and will last until December 31, 2023. Businesses that filed claims prior to the moratorium can expect to have their processing time doubled, from 90 days to 180 days, according to the Internal Revenue Service’s recent news release, IR-2023-169.

While the September 14, 2023, news release is focused on ERC claims, the IRS’s Criminal Investigation (“IRS-CI”) division is focused on a variety of COVID-19 related activities that it sees as fraudulent, according to the news release.

The ERC program set out to aid businesses struggling in the wake of the COVID-19 pandemic by providing tax credits for employers to keep employees on the payroll. But the IRS asserts that certain bad actors have put the entire program under increased scrutiny. This announcement, including the statements by IRS Commissioner Danny Werfel, draws a line between those businesses who may have “found themselves victims of aggressive promoters” and those “aggressive promoters and marketers” who are aiding businesses in filing these claims.

To that end, the IRS is offering the proverbial carrot to businesses that are willing to withdraw their claims or voluntarily re-pay their ERC funds. The exact contours of the treatment businesses might receive if they submitted claims that the IRS views as fraudulent or questionable is unclear, as the settlement program the IRS is developing has yet to be finalized. However, the news release provides some guidance for these businesses during the interim.

Businesses who have submitted “questionable” claims that have not been processed or paid are advised to withdraw those claims—even if the claim is already being audited. The news release is silent as to whether this will completely resolve a business’s pending audit. For businesses that have already submitted claims and received payment, the news release encourages future participation in a settlement program that will “allow the businesses to avoid penalties and future compliance action.” How to deal with businesses that paid a substantial contingency fee to a promoter or marketing firm is still an open question for the IRS.

Of note to promoters of unscrupulous ERC claims, is that the news release reinforces the IRS’s current emphasis on utilizing and expanding “promoter audits” conducted under Internal Revenue Code § 6700, et seq. See e.g. Tarpey v. United States, No. 22-35208, 2023 WL 5282601 (9th Cir. Aug. 17, 2023) (Ninth Circuit decision stemming from an I.R.C. § 6700 related action). Future enforcement action related to the ERC program will likely place a significant focus on these so-called “promoters,” particularly with respect to investigations handled by IRS-CI. If you have claimed an ERC benefit that you are now questioning, or if you have ”promoted” such a claim, the IRS’s recent news release should be viewed as a warning to get with your advisor to consider correcting any prior potential misreporting.

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About Gregory Rhodes

Gregory Rhodes is a shareholder in Dentons Sirote’s Birmingham office, where he is a member of the Tax practice group and leads the Dentons Sirote Tax Controversy team. In his practice, Greg focuses on complex tax controversy and tax litigation work. He has successfully represented professional athletes, partnerships, corporations, and individuals as a first-chair trial attorney in high-stakes federal and local tax litigation throughout the country. Greg has also successfully handled complex tax cases in various United States Circuit Courts of Appeals. In addition, Greg is a Fellow of the American College of Tax Counsel and is ranked in Chambers USA in Band 1 in Tax in Alabama.

About Michelle Levin

Michelle Abroms Levin is a shareholder in Dentons Sirote’s Huntsville office, where she is a member of the Tax practice group. She represents clients during all phases of federal income tax controversies, including IRS audit, administrative appeals, and court proceedings in the U.S. Tax Court, U.S. Court of Federal Claims, federal district court and the Courts of Appeals. Michelle has secured major victories for her clients in the Eleventh Circuit, Fifth Circuit, and Tax Court, elevating important Administrative Procedure Act issues in the tax controversy context. Her experience includes a wide range of complex tax issues. Michelle also counsels clients in tax and business planning. She works with clients to structure transactions in a manner that maximizes tax benefits, reduces risk, and complies with tax law at local, state, and federal levels. Michelle has also been elected as a Fellow of the American College of Tax Counsel.

About Mark A. Loyd

Mark A. Loyd, co-leader of Dentons' national Tax practice group, has decades of experience successfully resolving his clients’ state, local and federal tax issues. Elected as a Fellow of the American College of Tax Counsel, a distinction reserved for America’s very best tax attorneys, Mark is also Martindale-Hubbell AV® Preeminent™ Rated, the highest rating available, and has been selected as a Super Lawyer since 2015. Leveraging his extensive career in industry and CPA background, Mark has averted, managed and resolved sales, property, income and excise tax and licensing issues through audit management, administrative protest or settlement, and when necessary, through tax litigation in administrative tribunals, state courts and appellate courts, including the US Supreme Court. He’s licensed to practice in Kentucky, Indiana, Ohio, Tennessee, federal district and appellate courts as well as the US Court of International Trade.

About Kristin Martin Centeno

Kristin Martin Centeno is a Managing Associate in Dentons Sirote’s Birmingham, Alabama office. She is a member of the Tax practice group and focuses on tax controversy and tax litigation.

About Sidney Jackson

Sidney W. Jackson, IV, is a Senior Managing Associate in Dentons Sirote’s Birmingham, Alabama office. He is a member of the Tax Controversy practice group, where his practice focuses on all phases of federal and state tax controversies, including IRS audit, administrative appeals, and court proceedings in the U.S. Tax Court, federal district court, and state tax tribunals.