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IRS Working on Relief for Businesses That Deposited Possibly Improper ERC Payments

S.J. Steinhardt
Published Date:
Oct 30, 2023

Millions of businesses that may have been victims of fraudulent Employee Retention Credit (ERC) schemes are wondering what to do if they've already received a refund and deposited it, Accounting Today reported. The answer is that the IRS is working on relief program for them and will have more details later this fall.

The IRS has repeatedly warned business about “ERC mills” that employ aggressive tactics to pressure individuals and businesses into applying for a credit for which they may not be eligible. Earlier this month, the agency established a new process that gives employers the ability to rescind what may have been inaccurate ERC claims. But that program does not apply to businesses that have received and deposited their claim payments.

Under that program, claims that have been withdrawn will be treated as if they were never filed, so the IRS will not impose penalties or interest. One of the conditions for businesses to qualify for the process is that the IRS has not yet paid their claims, or that the IRS has paid the claims, but the businesses haven't yet cashed or deposited the refund check.

That move came a month after the IRS announced a moratorium on processing ERC claims. 

"You're going to have mistakes, you're going to have gross negligence, and you're going to have fraud," said Eric Hylton, a former commissioner of the IRS's Small Business/Self-Employed division who is now national director of compliance at the tax consulting firm Alliantgroup, in an interview Accounting Today. "Overall, if you have situations in which CPAs want to help file for amnesty, there are a number of different options there in which a company that has filed but the claim has not been processed, or they have not cashed a check, they can withdraw and the IRS has come up with some procedures as it relates to that."

Accounting firms have been swamped with clients asking about claiming the ERC, and now they're hearing concerns about potentially being penalized if they claimed the tax credits, Accounting Today reported, adding that the withdrawal process may help alleviate some of those worries.

The ERC is “an incredibly complex credit" with "very specific eligibility requirements," the IRS stated. Hylton observed  “You have some situations where some of these firms don't really have the background from a tax or accounting or even financial standpoint, and they haven't really done due diligence as relates to the complexity of the ERC, taking into account whether there's the interplay between ERC and the PPP [Paycheck Protection Program]. For a larger company, it's thinking about the aggregation rules, and whether they're looking at control groups, and recognizing that they would have to look at the wage disallowance for their individual tax return. There are a number of different complexities."

Hylton added that the IRS's Criminal Investigation division will be on the lookout for cases of outright fraud and is already investigating many such cases, especially when it comes to the promoters pushing the ERC claims on business owners.

For those businesses that deposited their payments, relief is on its way.

"If a business received a payment already, the IRS is building a special settlement program," IRS Commissioner Daniel Werfel told a recent press conference. "This option will allow repayments for those who received an improper ERC payment. We will have more details later in the fall on the settlement initiative."

The withdrawal process is “a great start,” Devin Tenney, a senior manager with Baker Tilly's Washington National Tax Office, told Accounting Today. "It is limited in this application, but the IRS did mention also in their communication that they will be subsequently coming out with another disclosure program. … I would imagine it's going to be directed toward those taxpayers that are ineligible for the withdrawal process but still would like some form of ability to unwind the situation they've found themselves in."

To hear about recent updates on Employment Retention Credits and other tax topics, attend the Foundation for Accounting Education’s Syracuse Chapter Taxation Conference on Nov. 1.

Click here to see more of the latest news from the NYSSCPA.