On Sept. 14, 2023 the IRS announced an immediate pause in processing new claims for the Employee Retention Credit (ERC) through at least the end of the year. This is in direct response to a surge of questionable claims and ongoing concerns about fraud surrounding the ERC.
If your financial institution filed an ERC claim prior to Sept. 14, the IRS will continue to process these. However, you can expect delays in processing times, as these claims will face additional scrutiny. The IRS has implemented stricter compliance reviews, so existing claims will go from a standard processing goal of 90 days to 180 days — even longer if the claim faces further review or additional supporting documentation is necessary.
This announcement has not curtailed efforts by aggressive promoters who continue to reach out to financial institutions through letters, phone calls and emails, claiming they have left hundreds of thousands of dollars on the table.
Are these communications legitimate? As with most tax matters, the answer is that it depends. Let’s dig deeper.
The IRS has noted its concerns about the legitimacy of many of the refund claims, putting the ERC at the top of its Dirty Dozen list of tax scams for 2023.
There are a few tests to determine eligibility. First, your financial institution may qualify under the governmental order test. Here, a financial institution must have been directed to close either fully or partially due to governmental order and unable to complete day-to-day operations. Despite closing the lobbies voluntarily, most of our financial institutions were able to continue much of their operations.
Therefore, it’s necessary to look to the gross receipts test to determine eligibility. The thresholds changed throughout the period, but overall, you needed to see a significant drop in gross receipts quarter over quarter when comparing 2019 income to 2020-2021 income. Most of our financial institutions saw growth, especially with PPP income and refinancing that happened during this time frame.
However, some financial institutions were able to meet these thresholds and have decided to file legitimate ERC claims.
Recently, the promoters have indicated that banks may qualify under a claim of general supply chain disruption. To rely on this, a bank must demonstrate that operations of a critical supplier were suspended due to a COVID-19-related governmental order. Even manufacturing clients are struggling to demonstrate this. It seems nearly impossible for our financial institutions, but aggressive promoters continue to try to make this claim.
Risks and schemes
The IRS’s Criminal Investigation team says it is “actively working to identify fraud and promoters of fraudulent claims for potential referral for prosecution to the Justice Department.” Thousands of ERC cases are under audit, and more than 250 criminal investigations have been initiated. This equates to more than $2.8 billion in potentially fraudulent ERC claims.
Many of these aggressive promoters of the ERC will collect a contingency fee of up to 25% of the ERC refund. Additionally, the wages related to the credit are no longer deductible on your federal income tax return. This requires you to amend your return. The income tax return has a statute of limitations of three years, whereas the credit has a six-year statute.
For example, five years from now, if the IRS looks at the credit and throws it out, the financial institution would have to pay back the credit plus interest and penalties, and they would still lose out on the deduction of those wages. They would also have no recourse for the contingency fee.
The IRS is implementing a new settlement program for employers who would like to withdraw pending claims and repay ERC refunds. The program will enable employers to avoid penalties and future compliance action. The IRS is still deciding how to deal with businesses who deducted a promoter contingency fee from their refund.
Finally, the IRS is looking at another program for employers who believe their claim was submitted improperly. Keep in mind that withdrawing a fraudulent claim will not exempt the filer from potential criminal investigation and prosecution.
While some financial institutions have filed legitimate ERC claims and are entitled to the credit, exercise caution when a boutique firm contacts your financial institution regarding ERC. If what they are promising sounds too good to be true, it likely is.
How Wipfli can help
The IRS will continue to update information pertaining to the handling of ERC claims. Wipfli’s team is closely monitoring the developments and can answer your questions and help financial institutions assess their options. Learn more about the ways Wipfli specialists can help your organization thrive amid today’s business and economic challenges.
Sign up to receive additional financial institutions information in your inbox or continue reading on: