The IRS has heightened its scrutiny of claims for the Employee Retention Credit (ERC) in response to concerns over potential fraudulent filings.
Small business owners may face repercussions, including penalties and eligibility assessments, in light of the IRS's increased attention to the ERC.
Small business owners are advised to assess eligibility, consider amending tax returns if necessary, and seek professional guidance due to the IRS's intensified efforts to deter fraudulent claims.
The IRS has recently started cracking down on its small business tax credit, which was originally meant to help struggling businesses stay afloat during the COVID-19 pandemic. This is largely due to a rise in potentially fraudulent claims and an array of related issues.
If you’re a business owner who’s claimed this tax credit, or are thinking about doing so, here’s what to know.
History of the Small Business Tax Credit
In March 2020, Congress created the Employee Retention Credit (ERC) or Employee Retention Tax Credit (ERTC). The purpose of this credit was to help struggling businesses stay afloat and prevent mass layoffs during the pandemic. But while this tax credit did indeed help many small businesses during those trying times, the IRS is now concerned about unscrupulous or potentially fraudulent tax filing practices.
This isn’t without reason.
The ERC was meant to protect a minor percentage of small businesses — that is, those hardest hit by the pandemic. However, the IRS has received roughly 3.6 million employee retention credit claims totaling nearly $153 billion since the law was first enacted. This means that nearly a quarter of the total number of businesses filing tax returns each year have tried to claim the tax credit.
Along with this, the ERC was only available during the 2020 and 2021 tax years. Despite this, the number of claims the IRS has received hasn’t slowed down since then. In fact, the agency has continued to receive a higher-than-expected number of new claims every day and is currently facing a backlog.
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IRS Cracks Down on Fraudulent Tax Claims, Delays New Applications
With a high likelihood of fraudulent claims, the IRS has started to crack down on businesses that have been underreporting their income or claiming additional tax deductions or credits that they should not have. Businesses that improperly claim the tax credit could be facing civil audits or even criminal charges.
As the IRS wades through its pending claims, the agency has announced that it would stop accepting new claims throughout the rest of 2023 — and possibly beyond. The agency will still process previously submitted applications. However, it could take up to 180 days or more to fully process a pending claim.
There’s a reason why the processing times are expected to be so long. Not only are these filings complex, but there’s also a high volume of applications to go through. Plus, the agency has started implementing more enhanced compliance checks to ensure that only eligible businesses receive a tax credit.
The main goal here is to protect against lost revenue, minimize fraudulent tax filing practices, and cut down on inaccurate tax returns. These changes are also meant to ensure small business owners who do qualify for a tax credit receive their due. More accurate tax preparation could also lower the chances of a business getting audited in the future.
What Small Business Owners Can Do Next
Although the IRS is cracking down on employee retention credit claims, there is good news. The agency has decided to put less priority on smaller businesses or low-income tax filers, meaning fewer audits. Instead, the IRS is prioritizing tax credit claims and unpaid taxes of higher earners and large corporations. This means less stress for smaller companies.
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For small business owners, it’s important to understand how these tax changes could affect you. Here are some of the main ways:
- If you’ve filed for the employee retention credit, review the eligibility requirements carefully. If you determine that you’re not eligible after all, you may be able to withdraw a still-pending claim without penalty.
- If you filed for a claim that you’re not eligible for, you may be able to amend your 2020 and 2021 tax returns. And if you’ve already received a tax credit, you will need to pay it back — possibly with interest or other penalties. However, you may also qualify for a new settlement program designed to help businesses repay improperly claimed tax credits.
- If you believe you’re eligible for the employee retention credit but haven’t filed a claim yet, carefully review the requirements. You won’t be able to file right now, but this can help prepare you for when the IRS lifts its moratorium on processing new ERC claims.
When in doubt, speak with a reputable tax professional about your options and eligibility. They can help you understand the requirements and ensure you get the tax credit you’re owed.
Also, be aware of any employee retention tax credit businesses claiming to help you file a claim on your behalf. While some of these companies are legitimate, be on the lookout for false promises, guarantees that seem too good to be true, or expensive fees. You can also speak with a qualified tax attorney to protect your business from fraudulent practices or industry scams.
The Bottom Line
While the IRS is cracking down on the employee retention credit, it’s not all bad news for small business owners. If you’re eligible for the tax credit and haven’t yet applied for it, you may be able to do so once things ease up. If you’re not sure how to go about this on your own, a verified company that specializes in this field may be able to help.