The IRS made an announcement on Thursday, September 14, 2023 of “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.” This ERC moratorium has already been covered widely in the media:
- The Wall Street Journal: IRS Shuts Door on New Pandemic Tax Credit Claims Until at Least 2024
- The Washington Post: IRS halts processing claims for pandemic tax credit tied to fraud
- The New York Times: I.R.S. Freezes Pandemic-Era Tax Credit Amid Fraud Fears
- The Associated Press: IRS will pause taking claims for pandemic-era tax credit due to an influx of fraudulent claims
- CNBC: IRS halts processing of a small business tax break amid ‘surge of questionable claims’
- Bloomberg Tax: IRS Stops New Pandemic-era Tax Credit Claims to Curb Scams
IRS published two extensive press releases:
- IR-2023-169: To protect taxpayers from scams, IRS orders immediate stop to new Employee Retention Credit processing amid surge of questionable claims; concerns from tax pros
- IR-2023-170: Red flags for Employee Retention Credit claims; IRS reminds businesses to watch out for warning signs of aggressive promotion that can mislead people into making improper ERC claims
What is the moratorium?
This IRS says that new ERC claims filed after September 14th will not be processed before the end of 2023. Previously filed claims will continue to be processed, but with enhanced scrutiny, and “during this period, existing ERC claims will go from a standard processing goal of 90 days to 180 days – and much longer if the claim faces further review or audit.” Of course, many taxpayers have already experienced wait times well beyond 180 days.
Settlement Program and withdrawal option
Also previewed are two new policies with details forthcoming. First, “a settlement program for repayments for those who received an improper ERC payment,” and second, “the IRS is finalizing details that will be available soon for a special withdrawal option for those who have filed an ERC claim but the claim has not been processed. This option – which can be used by taxpayers whose claim hasn’t yet been paid– will allow the taxpayers … to avoid possible repayment issues and paying promoters contingency fees.”
Has the IRS Changed the rules?
As discussed in a previous post, just like the July 28th FAQs did not make any policy changes or updates to guidance, the September 14th updates similarly echo previously published guidance. However, some of the warnings articulated in these FAQs probably indicate the types of errors the IRS is seeing when processing claims. The following are the notable changes made to the FAQ:
- Both A2 and A3 include a new emphasis on the fact that self-employed individuals without employees will not qualify for the ERC.
- Questions 4 and 5 are newly added and deal with how the ERC interacts with PPP loans, restaurant revitalization grants, and shuttered venue operator grans. These topics were addressed in previous Notices.
- Question 6 is new and asks, “How does being an essential business affect my eligibility for ERC?” And the answer explains that “Being an essential business doesn’t necessarily mean you’re ineligible for ERC. You may be eligible … if you can show that you experienced a partial suspension of operations due to an order from an appropriate governmental authority.” The answer further references Notice 2021-20 Question 17, Example 4, which discusses a hospital that is an essential employer but that was required to suspend elective procedures due to government orders as an example.
There is a new section called “Qualified Wages” with one question summarizing the rules that have been previously published in prior Notices. The Answer warns, “Be wary of anyone who says you can use all wages when calculating your ERC.”
Under “Qualifying government orders,” Question 5 is new and addresses an area of the guidance that has probably caused the most confusion: “Q5. What does ‘more than nominal’ mean when considering whether my business or organization was partially suspended?”
The IRS introduced the “more than nominal” standard in a June 19, 2020 update to its original ERC FAQ prior to the publication of Notice 2021-20 on March 1, 2021. In Notice 2021-20, the IRS added to the more than nominal test the idea that “Solely for purposes of this employee retention credit, a portion of an employer’s business operations will be deemed to constitute more than a nominal portion of its business operations if either (i) the gross receipts from that portion of the business operations is not less than 10 percent of the total gross receipts (both determined using the gross receipts of the same calendar quarter in 2019), or (ii) the hours of service performed by employees in that portion of the business is not less than 10 percent of the total number of hours of service performed by all employees in the employer’s business (both determined using the number of hours of service performed by employees in the same calendar quarter in 2019).” As confirmed by the Notice’s authors at the time, and later published in IRS training materials, this 10 percent rule is a “safe harbor,” and not a baseline requirement.
The new FAQ, however, may imply that IRS considers the 10 percent rule a basic requirement:
“IRS will consider you to be partially suspended if more than a nominal part of your business was suspended by a governmental order. The IRS considers ‘more than nominal’ to be at least 10% of your business based on either the gross receipts from that part of the business or the total hours your employees spent working in that part of the business. If all parts of your business could operate but you had to modify how it operated, then we will consider you to be partially suspended if you can show that the order had more than a nominal effect on your business. We consider ‘more than a nominal effect’ to be at least a 10% reduction in your ability to provide goods or services in the normal course of your business.”
Under “Decline in gross receipts,” there is a new Question 2 discussing what types of income should be included when calculating gross receipts. But again, this reiterates guidance previously published in Notices.
Bloomberg Tax quoted IRS Commissioner Daniel Werfel saying, “We want this program to work as it was designed, helping businesses that qualify under stringent pandemic requirements,” and The New York Times and CNBC both quoted Werfel calling the ERC a “great program to help small businesses.” Regarding the continuing influx of new claims, Werfel stated, as quoted in the Washington Post, “We should see only a trickle of employee retention claims coming in. Instead we are seeing a tsunami.” But this expectation fails the acknowledge the retroactive changes Congress made to the ERC that made it relevant to small business and the complexity of the program that has taken time for those small businesses to contend with.