On September 14th, the IRS announced it would place a moratorium on processing new Employee Retention Credit (ERC) claims that would run through at least December 31st.

The ERC, introduced in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, is a refundable tax credit for businesses and tax-exempt organizations that had employees and were affected during the COVID-19 pandemic.

Due to the ERC's relative complexity and the actions of bad actors, the IRS has received a rising number of improper claims.

According to the IRS, "a substantial share of new claims are ineligible and increasingly putting businesses at financial risk by being pressured and scammed by aggressive promoters and marketing."

While processing for new claims would be paused, the payouts for older legitimate claims would continue during the moratorium.

To read the full moratorium announcement from the IRS, click here.

Who is Eligible for the ERC?

To avoid being taken advantage of by bad actors, businesses should consult a tax professional to fully understand ERC eligibility.

Eligible employers could claim the ERC for wages paid between March 13, 2020, and December 31, 2021. According to the IRS website, this is what constitutes an eligible business or trade:

• It sustained a full or partial suspension of operations due to orders from an appropriate governmental authority limiting commerce, travel or group meetings because of COVID-19 during 2020 or the first three quarters of 2021,
• It experienced a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021, or it qualified as a recovery startup business for the third or fourth quarters of 2021.

ERC Supply Chain Confusion

On July 20, prior to the moratorium, the IRS had hinted at their ERC fraud concerns in an announcement that offered clarification on how businesses impacted by supply chain shutdowns would be affected.

"The further we get from the pandemic, we believe the percentage of legitimate claims coming in is declining," said IRS Commissioner Danny Werfe at the IRS Nationwide Tax Forum in Atlanta. "Instead, we continue to see more and more questionable claims coming in following the onslaught of misleading marketing from promoters pushing businesses to apply. To address this, the IRS continues to intensify our compliance work in this area."

The IRS said that businesses are being lured by claims of ERC reimbursement by tax professionals who are operating on less than altruistic motives.

"Hard-working tax professionals who play by the rules see their clients go elsewhere, lured by false promises and wild exaggerations," Werfel said. "The resulting number of claims prevents the IRS from doing other priority work. But the biggest risk is being taken by the promoters pushing these schemes and businesses filing these claims. This is an area where we urge caution; those improperly claiming the credit could face follow-up action from the IRS."

In this announcement, the IRS also provided guidance on how supply chain disruptions would affect ERC eligibility by issuing Generic Legal Advice Memorandum (GLAM) 2023-005. GLAM 2023-005 outlines five supply chain disruption scenarios.

Scenario 1: The employer wasn't subject to limiting government orders due to COVID-19, but the employer did experience delays in receiving critical goods. The employer could continue operating thanks to their surplus of critical goods. The employer's supplier never provided proof that their delays were due to a government order and the Employer couldn't find any evidence that their delays were caused by a government order.

Scenario 2: The employer wasn't subject to limiting government orders but had critical goods stuck in transit. In this scenario, the employer couldn't determine that the disruption was due to government orders.

Scenario 3: The employer and their supplier's operations were suspended by government mandate in April 2020 and lifted in May 2020. The employer then experienced a delay in receiving critical goods from their supplier but didn't receive or find confirmation that the delay was due to government orders.

Scenario 4: The employer was not subject to government shutdown but could not obtain critical goods from a supplier. The employer was able to obtain the goods from a more expensive supplier and could continue its operations.

Scenario 5: Product shortages forced this retail employer to raise prices on other products due to limited supply. The product shortage did not prevent the employer from operating.

After presenting the scenarios, GLAM 2023-005 goes into further analysis citing language from the CARES act as reasoning for whether a business will be deemed eligible.

In the presented scenarios, only the employer in scenario 3 would be eligible to receive the ERC, as their operations were suspended by government order.

Overall, the IRS guidance indicates that employers or suppliers need to provide evidence that they were unable to continue operating because their suppliers were under government-mandated shutdowns that directly impacted their ability to deliver critical goods or materials.

Need Tax Credit Guidance? MRPR Can Help!

Clearly, navigating ERC eligibility can be a challenge. If your business needs guidance on whether your business is eligible, the experienced tax team at MRPR is here to help. If you're an MRPR client who had an ERC claim prepared by us, your claim will have been submitted before the moratorium began.