July 31, 2023
By: Blair Hancock and Ellen Lamb
Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC), a fully refundable federal tax credit created by the CARES Act and amended by the Relief Act, the American Rescue Plan, and the Infrastructure Investment and Jobs Act, was intended to encourage employers to keep people on the payroll during the pandemic lockdown. Eligibility was originally fairly narrow and well-defined, but amendments to the program broadened eligibility and created confusion about how to measure it. The program ended at the close of 2021.
The Internal Revenue Service (IRS) quickly put together guidance and took applications by paper mail, not electronically. Applications flooded in, eventually totaling 2.5 million claims. This led to a backlog of applications that is only now being resolved. Adding to the frustration, employers have been unable to check the status of their ERTC claims. Mounting concerns of scams and potential fraud within the program have led to increased audits and criminal investigation work on ERTC claims, further prolonging delays.
ERTC Mills
An unscrupulous group of businesses formed “ERTC mills” to convince small businesses and nonprofit organizations that they could and should have applied for the ERTC, and that they could still qualify for hundreds of thousands of dollars in refunds. Thousands of businesses have responded to these aggressive (and sometimes predatory) solicitations, which include phone calls, subway posters, and other means. The ERTC mills take some percentage of whatever the businesses get from the IRS, often upfront, and some make predatory loans based on the anticipated refunds.
What Small Businesses Should Know
The IRS will audit ERTC recipients, which means many small businesses will wind up having to return these refunds, including penalties and interest — even though they did not receive the full amount. Some organizations, realizing they have received this money when they were not eligible, are trying to figure out what to do. Several members of Congress have become increasingly frustrated about the ERTC program and recently held an oversight hearing within the U.S. House Ways and Means Committee.
On July 27, 2023, witnesses before the U.S. House Ways and Means Committee testified that Congress and the IRS need to create some kind of amnesty program for small businesses that were legitimately deceived by these ERTC mills. Further testimony indicated the IRS needs to communicate clearly and effectively about its eligibility standards and what businesses in this situation should do.
Resources
We are sharing a full summary of the IRS webinar on the ERTC and the U.S. House Ways and Means Committee Meeting on ERTC both held on July 27, 2023, as well as slides from the Employee Retention Credit presentation, given by the IRS’ Office of Fraud Enforcement and National Fraud Counsel on July 25, 2023, and will relay additional information as it becomes available.
Questions?
Contact GrayRobinson Government Affairs Advisor Blair Hancock or a member of the Government Affairs and Lobbying Section.