Employee retention credit update: Why is IRS putting a pause on processing new claims?

The IRS has announced that it will stop processing new employee retention credit (ERC) claims through at least December 31, 2023. This move is in response to promoters who have aggressively encouraged employers to file false or doubtful ERC claims for this refundable credit available to eligible businesses that paid wages after March 12, 2020, through the end of the program to keep their staffs employed during the height of the pandemic. (The IRS has not prohibited taxpayers from submitting new ERC claims. New ERC claims will simply be held in reserve until the IRS once again begins processing claims.)

Additionally, existing ERC claims (those submitted before the IRS’ announcement) will continue to be processed, but the IRS’ processing time has been extended from 90 days to 180 days to provide more time for IRS agents to examine each claim. The IRS is also working to implement a special withdrawal option to allow employers who have submitted doubtful ERC claims to withdraw those claims. Additionally, the agency is working on a program that will allow employers to repay improperly received ERC claims (it is unclear whether these repayments can be made without the threat of criminal investigation).

To offer further guidance to employers on this recent ERC announcement, we asked two professors and authors of ALM’s Tax Facts – Robert Bloink and William H. Byrnes – with opposing political viewpoints to share their opinions about the IRS’ decision to stop processing new ERC claims.

Below is a summary of the debate that ensued between the two professors.

Robert Bloink: Far too many small business owners have fallen prey to predatory promoters who promise the world. Many of these business owners never intended to submit a false claim—they just didn’t understand the rules. The IRS is simply halting the program to give everyone time to catch up–themselves included–to prevent a waste of taxpayer dollars. That’s perfectly understandable.

William Byrnes: Late in 2022, the American taxpayers gave the IRS an additional $80 billion in funding to improve on enforcement and taxpayer services. The last thing we need is more delays. The IRS has the resources and the tools they need. This delay seems completely unnecessary and, in the end, will delay collection of improperly paid-out ERC funds.

Bloink: The ERC is an incredibly complex provision that was released at a time when countless small business owners were panicking over pandemic-related safety measures. Many didn’t have the time to fully understand the rules. Others lacked access to the expert advice needed to determine whether they really qualified. This is one area where relief is justified, given the circumstances that existed at the time.

Byrnes: Taxpayers who failed to understand the law may qualify for relief from certain penalties, sure–but they shouldn’t be protected from all consequences of their mistake. They also deserve notice sooner rather than later, especially in cases involving innocent mistakes. For months, the IRS has been warning taxpayers about scams involving the ERC. I just don’t see this open-ended delay as justified.

Related: Small businesses struggle with ERC tax credit submissions

Bloink: The IRS is working on programs to prevent innocent taxpayers from being punished for schemes perpetrated by others. The magnitude of the problem is obviously such that detailed programs will have to be developed and implemented to prevent wasting taxpayer dollars and to avoid allowing non-qualified businesses to profit from improperly awarded ERC funds. That can take time. In the long run, it will be better to take the time now to develop workable solutions instead of hastily implementing programs that don’t work in the end.

Byrnes: Taxpayers who legitimately qualify for the ERC are now being penalized because the government says they won’t–or can’t–even review their retroactive claims. It doesn’t seem that the IRS actually has a workable solution. Instead, it seems like they’re kicking the can down the road to deal with this problem later rather than taking the steps necessary to collect as many erroneously paid dollars as possible so that businesses that truly did qualify can receive the benefits they deserve.

Robert Bloink, Esq., LL.M., who has taught at the Texas A&M University School of Law and the Thomas Jefferson School of Law, and William Byrnes, Esq., LL.M., CWM, an executive professor and associate dean of special projects at the Texas A&M University School of Law, are co-authors of Tax Facts, a reference solution that helps to answer critical tax questions and provides the latest tax developments.