The lucrative employee retention tax credit was suspended by the IRS due to questionable claims. Here’s what small businesses need to know.

The Internal Revenue Service has suspended the processing of a very popular pandemic-era tax credit due to a “surge of questionable claims.”

The Employee Retention Credit, created back in 2020 as part of the CARES Act, was meant to be used as an incentive for employers to keep their employees on the payroll during the pandemic. Businesses during most quarters of 2020 and 2021 that were forced to fully or partially shut down due to government orders could take as much as a $7,000 credit per employee against their quarterly payroll taxes. The same credit was made available for businesses that suffered a certain amount of revenue decline compared to similar quarters before the pandemic.

The program’s popularity is because the credit is “refundable” which means that if the calculated amount of the credit exceeded the taxes paid, the business owner would receive the difference back in a cash payment.

Thanks to the potential windfall involved, many unscrupulous firms have been sending emails and calling unsuspecting small business owners offering — for a fee, of course — to help them stake their claim, often when a business isn’t eligible. Because of the volume of dubious tax returns filed by these companies, the IRS has suspended the processing of the credit through at least the end of the year for “enhanced compliance.”

In its announcement, the IRS said it is “increasingly alarmed about honest small business owners being scammed by unscrupulous actors” perpetuating these scams.

Many small businesses have turned to their tax professional or payroll company for help. But because of the complexities of determining whether or not a company is eligible and the paperwork involved in amending prior payroll tax returns, the suspension has come as a relief to many experts.

“As a tax professional, I am in complete agreement with the IRS announcement of the ERC moratorium,” said Mitchell Gerstein, a senior tax adviser at accounting firm Isdaner & Co. in Bala Cynwyd. “Most accounting firms, including my firm, are not actively preparing ERC claims as their clients’ claims were submitted awhile back.”

Gerstein believes that many of the ERC claims submitted over the past six months — if not longer — are submitted by what he called “ERC mills” which have “promoted misinformation to entice ERC filings along with a hefty contingency fee.” The IRS says that the moratorium will help protect taxpayers by adding a new safety net onto the ERC program to focus on fraudulent claims and scammers taking advantage of honest taxpayers.

Mike Jamgochian, a certified public accountant based in West Chester, agreed, but thinks the IRS shares some of the responsibility for the situation.

“Part of the blame is on the IRS for making late, on-the-fly interpretations of the credit,” he said. “Even the most effective firms had challenges interpreting the IRS’ intentions, and many were conservative in their approach.”

IRS Commissioner Danny Werfel in a statement said, “The continued aggressive marketing of these schemes is harming well-meaning businesses and delaying the payment of legitimate claims, which makes it harder to run the rest of the tax system. This harms all taxpayers, not just ERC applicants.”

If you’ve already filed — whether you’ve received the credit or even a cash refund from the IRS yet — and your claim is legitimate, then you have nothing to worry about. However, you should check with your accountant or payroll service to be sure. For those still waiting, processing has been suspended but it will restart in early 2024, and the credit will eventually be applied. It will, however, probably take more time than expected (as much as 180 days from the time of filing, according to the IRS announcement).

Don’t panic if your return is in process or if you’ve already received the credit and you think it may be incorrect. The IRS is working now on further guidance, expected this fall, on how to withdraw unprocessed ERC claims, along with a settlement program for small businesses that wrongly received the credit and want to pay it back. If you’re not sure whether or not your claim is suspect, you can review a list of “red flags” recently issued.

“The IRS plans on rolling out new announcements and a plan in the coming weeks which will include a process to withdraw ERC claims already submitted,” Gerstein said. “They’ve indicated there will be a way to withdraw the claim and avoid penalties and future actions by the IRS.”

Gene Marks is the founder and president of the Marks Group, a small-business consulting firm based in Bala Cynwyd.