In keeping with their goal to transform the digital economy by implementing real-time payments (RTP) on the RTP network, Mastercard and TCH, or The Clearing House, have decided to prolong their multi-year relationship. With the help of this Mastercard TCH partnership, businesses, governments, and consumers will be able to navigate and prosper in the quickly changing digital landscape by utilizing cutting-edge instant payment use cases for various payment procedures.

Notably, Mastercard will continue to serve as TCH’s exclusive supplier of immediate payment software for its RTP network, allowing the integration of new instant payments for various uses across different entities. In 2017, both companies joined forces to introduce the RTP Network, marking the first new payments rail framed by Mastercard in four decades. Presently, the ongoing collaboration focuses on advancing real-time account-to-account technologies. These innovations facilitate the seamless transmission of data within the network, not only across the US but also on a global scale.

Key Takeaways

• Enhanced Digital Economy Commitment: The extended partnership between Mastercard and The Clearing House reaffirms their dedication to transforming the digital economy by implementing real-time payment systems. This collaboration aims to introduce innovative instant payment use cases, providing advanced capabilities for businesses, governments, and consumers in the fast-moving world of payments.
• Mastercard’s Exclusive Role: Mastercard continues to serve as the exclusive instant payments software provider for TCH’s RTP network, solidifying its position in advancing real-time account-to-account technologies. The collaboration focuses on integrating new instant payment not only within the US but also globally.
• Real-Time Payments Impact Across Sectors: The partnership highlights the critical role of instant payments in elevating the value and efficiency of financial transactions across diverse sectors. RTP ensures immediate access and confidence in payment receipt for consumers, streamlines process for businesses, and activates local economies for governments through efficient disbursement and settlement processes.
• Competition and Industry Recognition: The collaboration builds upon TCH’s efforts to expand its RTP network amidst competition from FedNow. The RTP network’s significant milestones, such as surpassing one million daily payments, reflect industry recognition of the advantages offered by real-time transactions. Financial institutions’ increasing usage of the RTP network demonstrates its effectiveness in addressing real-world challenges and innovation in payment processes.

Mastercard TCH Partnership – Driving Next-Gen Instant Payment Capabilities

Mastercard has recently declared the extension of its partnership with TCH, emphasizing the enhancement of user capabilities. In a multi-year collaboration initiated by Mastercard and TCH, the two entities are working jointly to introduce improved features for businesses, governments, and consumers. The primary goal is to facilitate the adoption of the digital economy through the implementation of RTP on the RTP network. Additionally, this partnership solidifies Mastercard’s exclusive role as the provider of instant payment software for TCH’s RTP network, enabling both entities to integrate additional instant payment.

RTP guarantees customers instant access and assurance that their payments will always be received. It promotes timely wage disbursements, optimizes capital workflows, improves liquidity management, and streamlines payment operations for enterprises. Governments might also gain from stimulating local economies by ensuring that settlement and distribution procedures are effective. The expanded collaboration emphasizes how important real-time payments are to improving the effectiveness and value of financial transactions in a variety of industries.

The Federal Reserve’s immediate payments system, FedNow, introduced last year, is a competitor to TCH’s RTP network expansion efforts. This partnership with Mastercard strengthens TCH’s present efforts in this regard. The year 2017 saw TCH, which is owned by significant US banks, launch its instant payment network services, RTP. In the United States, financial institutions that hold around 90% of the demand deposit accounts have access to the RTP network.

Linda Kirkpatrick, who is the President, of North America at Mastercard, highlighted the key role of advanced technology in offering businesses and consumers increased flexibility in payment methods. The enduring collaboration with TCH contributes to expanding payment options by enabling contemporary and widely accessible real-time channels for bank transactions. Kirkpatrick expressed satisfaction in extending and reinforcing their commitment to TCH and its owner banks, emphasizing the shared objectives of ensuring the dependability, efficiency, and security of instant payments.

The RTP network, TCH’s instant payments system accessible to all insured depository financial institutions in the US, achieved a significant milestone last September by surpassing one million daily payments. This milestone reflects the growing recognition among the institutions and their customers of the advantages offered by real-time transactions, such as payment confirmation, enhanced control over payment schedules, and immediate fund availability.

With over 60 million transactions processed each quarter, the RTP network is experiencing increased usage as financial institutions leverage its real-time payment capabilities to address real-world challenges in innovative ways.

FedNow is a real-time payment system that competes with the growing RTP network. Interest in the RTP network appears to have increased with the release of FedNow. FedNow and RTP are competing with each other for the business of financial institutions. Regarding the Fed’s fast payments system, Mastercard has taken a cautious position. Previously, despite the FedNow system’s early acceptance by significant corporations like Fiserv and JPMorgan Chase, Mastercard CEO Michael Miebach noted that it lacks capabilities and a consumer platform.

Lee Alexander, Executive Vice President and CIO at TCH mentioned that TCH and Mastercard collaborated on the creation of the RTP network, recognized as the leading instant payment platform in the US. With a robust history of successful collaboration in delivering scalable, secure, and innovative products, the extended partnership aims to facilitate the development of the next generation of real-time payment capabilities for financial institutions and their customers.

All in all, the RTP network was designed to cater to institutions of various sizes, providing a stage for innovation that enables them to introduce new services and products to their customers. Financial institutions have the flexibility to connect to the RTP network directly, utilize third-party providers, and collaborate with corporate credit unions and bankers’ banks.

About MasterCard

Mastercard, Inc. is a technology company deeply involved in the payments industry, serving as a vital link connecting consumers, financial institutions, merchants, governments, and businesses. Established in November 1966 and headquartered in Purchase, NY, Mastercard provides innovative payment solutions encompassing credit, debit, prepaid, commercial, and payment programs.

The company acts as a crucial network, facilitating transactions between issuing banks and acquiring banks to ensure authentication and fund transfers. Its role extends to enabling payments for various purposes, including shopping, travel, business operations, financial management, and more. Mastercard specializes in global digital payments and commerce, offering cutting-edge mobile payment processing solutions.

In the fiscal year 2022, Mastercard achieved notable financial success, recording annual revenues of $22.23 billion and a net profit of $9.93 billion. As a technology-driven entity, Mastercard continues to play a significant role in shaping the face of modern payment solutions.

About The Clearing House

Founded in 1853, TCH stands as the oldest banking association and payments company in the United States. It is collectively owned by the world’s largest commercial banks, employing over two million individuals and holding more than half of all US deposits.

TCH Payments Company LLC plays a pivotal role by providing payment, clearing, and settlement services to its member banks and other financial institutions. Daily, it handles the clearing of almost $2 trillion, representing nearly half of the funds-transfer, ACH payments, and check-image payments made in the US.

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On the advocacy front, TCH Association LLC operates as a nonpartisan organization, championing the interests of its owner banks. This is accomplished through regulatory comment letters, amicus briefs, and white papers, addressing a spectrum of systemically important banking issues.

Conclusion

The extended collaboration between Mastercard and The Clearing House marks a significant stride towards enhancing digital economy capabilities. Their commitment to RTP underscores a shared objective to propel businesses, governments, and consumers into a dynamic digital era. Mastercard’s role as the exclusive instant payments software provider for TCH’s RTP network positions them at the forefront of advancing real-time A2A technologies.

This partnership not only ensures immediate access for consumers and streamlined processes for businesses but also holds promise for efficient disbursement and settlement processes for governments. Amidst growing competition in the real-time payments realm, the enduring collaboration between Mastercard and TCH exemplifies a commitment to reliability, efficiency, and security in the evolving world of financial transactions.

The IRS has repeatedly cautioned taxpayers about a rise in aggressive marketing related to questionable or fraudulent claims for the Employee Retention Credit (ERC). Initially, the IRS addressed ERC claims by including them in their Dirty Dozen list. Later, on September 14, 2023, the IRS took immediate action by placing a moratorium on processing new claims, which will continue at least until 2023.

The IRS is now providing a solution for taxpayers who have fallen prey to ERC scams and have yet to receive their refunds. On October 19, 2023, the IRS introduced an ERC withdrawal procedure. This initiative aims to assist businesses concerned about the eligibility of their claims.

The IRS instituted a “withdrawal process” for specific small businesses that submitted ERC claims during the Covid and now think they might not be qualified. Once presented as a relief plan, this procedure is intended for small firms that legitimately applied for financial aid but were later approached by the Internal Revenue Service to question the validity of their claims. These companies now have to deal with interest, fines, or payback. Company owners that submit ERC claims need to be fully aware of the qualifying requirements and the possible repercussions of making inaccurate, fraudulent, or inappropriate claims.

Key Takeaways:

• Introduction of a Targeted Solution: The IRS has responded to the surge in fraudulent Employee Retention Credit (ERC) claims by unveiling a withdrawal process on October 19, 2023. This targeted initiative is specifically designed to aid businesses that have fallen victim to ongoing scams and have concerns about the eligibility of their ERC claims.
• Shielding Businesses from Audits and Penalties: The withdrawal procedure protects businesses influenced by third parties or misled into filing ineligible ERC claims. Businesses can shield themselves from potential audits and penalties by retracting these claims. Withdrawn claims will be treated as if they were never submitted, offering a means of rectification.
• Eligibility Criteria for ERC Withdrawal: Businesses eligible for the ERC withdrawal process include those who have claimed the credit on specific employment tax return forms but have yet to receive a refund or have not cashed the refund. The withdrawal applies to businesses that filed adjusted returns solely for ERC claims without any other modifications.
• Irreversible Nature of ERC Withdrawal: While the ERC withdrawal process benefits eligible businesses, it comes with a crucial caveat – once requested, the withdrawal is irreversible. The IRS emphasizes the importance of businesses approaching reputable tax providers for guidance before initiating a withdrawal, highlighting the permanent nature of this decision.

The Necessity Of ERC Withdrawal Procedure

In light of the financial difficulties posed by COVID-19, the ERC was created to support qualified small enterprises in keeping their workforces on board. Unfortunately, several tax consultants have abused the credit by using aggressive marketing strategies. These advisors lured small companies into making illegal tax credit claims and amending payroll tax forms. The IRS decided to halt assessing new ERC applications until the end of 2023 as an outcome of this misuse, which led to an increase in invalid filings.

The purpose of the unique withdrawal procedure is to enable companies that other people have influenced to withdraw their ERC claims. This move aims to protect them against more audits and fines. Claims that are withdrawn will be handled as though they were never filed. It is crucial to remember that the law does not shield companies who intentionally submitted false ERC claims or colluded to do this from possible criminal inquiries and legal action.

The IRS press release states that certain employers who submitted an ERC claim but have not received a refund yet can withdraw their application thanks to this recently added withdrawal option. They can avoid penalties, interest, and future payback by doing this. To avoid the possibility of getting an ineligible reimbursement, employers have the option to withdraw an ERC claim while it is still being processed.

The statement highlights that the IRS created the withdrawal option to support small company owners and other individuals who were duped or coerced into filing claims not eligible by ERC advertisers or promoters. Claims that are withdrawn will be regarded as never submitted, and the IRS won’t charge interest or penalties in these situations. It went on to say that it’s important to remember that anyone who intentionally made a bogus claim or who assisted or conspired to engage in such behavior should be informed that they could still face a criminal inquiry and prosecution if they decide to withdraw their fraudulent claim.

Who Is Eligible For The ERC Withdrawal Process?

Businesses are eligible to utilize the ERC withdrawal process under the following conditions:

• They filed a payroll return form for the employees (Form 941X, 943X, 944X, CT1X) claiming the ERC, but they have not received a refund, or if they have, they have not cashed the refund.
• With no other changes, they filed an updated return only to claim ERC.
• They plan to give up the ERC claim in its entirety.

Businesses can benefit from this unique ERC withdrawal method, but there’s a big catch and that is ERC removal is irreversible once requested.

IRS advises businesses who suspect the invalidity or inaccuracy of their claims to seek guidance from a trusted service provider with expertise in incentives and credits before initiating a withdrawal. This step ensures a thorough reassessment of refunds before making the irreversible decision to withdraw.

How To Initiate An ERC Withdrawal?

The IRS has specific instructions for withdrawing Employee Retention Credit (ERC) claims. The withdrawal method depends on the status of your ERC claim; for instance, for those who haven’t received a refund and haven’t been informed your claim/application is under an audit, here are some steps you can take:

• Create a duplicate of the adjusted return (e.g., 941X) containing the claim you intend to withdraw.
• On the first page, inscribe “Withdrawn” in the left margin.
• An authorized person should sign and date the right margin of the first page. Additionally, they should write their name and title next to their signature.
• Fax the duly signed return to the IRS’s ERC claim dedicated withdrawal fax line at 8557387609. For those without access to a fax, the adjusted return can be mailed to the address specified in the return instructions.

If you have yet to receive a refund and have been informed that your ERC application is under audit, the withdrawal steps remain the same as outlined for Status 1. However, there is a requirement to mail or fax the request to a different location. Here’s a detailed breakdown:

• Follow the same procedures as outlined for Status 1, which include copying the amended return containing the withdrawn claim, writing “Withdrawn” on the first page’s left margin, and having an authorized individual sign and date the right margin while putting their name and title next to the signature.
• If your case has been assigned to an examiner, ask them how to mail or fax your withdrawal request directly to them.
• If you would still like to be assigned an examiner, reply to the audit notice with your request to withdraw using the format specified.

In the scenario where you have received a rebate check but haven’t deposited or cashed it, follow these steps for the claim withdrawal:

• Prepare the claim withdrawal request by following the procedures listed in Status 1. But please do not fax the request.
• Mark “Void” in the endorsing section on the reverse of the return check.
• With the voided check, include a message that reads “ERC Withdrawal” and explains why you returned the refund check.
• Keep copies of all pertinent paperwork for your tax records, such as the signed and dated withdrawal request form, the explanation notes, and the front and reverse of the canceled check.
• The voided check should not be bent, paper-clipped, or stapled. Enclose it with your request to withdraw your claim and send the package to the IRS through certified mail.

After reviewing your request, the IRS will notify you by letter regarding the acceptance or rejection of your request. It’s important to note that an approved request is only effective once the IRS has officially notified you of its acceptance.

If you have accepted a rebate check and have already deposited or cashed it, the withdrawal option is currently unavailable for claims associated with deposited or cashed refund checks. However, the IRS has indicated the possibility of implementing a program to address this scenario shortly.

Conclusion

The IRS has introduced a targeted withdrawal process for businesses ensnared by fraudulent or questionable claims related to the Employee Retention Credit (ERC). Recognizing the surge in misuse of the ERC, particularly by unscrupulous tax consultants, the IRS implemented a moratorium on new ERC claims and has now unveiled this withdrawal initiative.

This unique withdrawal process allows eligible businesses to retract their ERC claims, shielding them from potential audits and penalties. Emphasizing the irreversible nature of the withdrawal, the IRS urges caution and certainty in decision-making. Eligible businesses facing interest, penalties, or repayment concerns can initiate withdrawal following specific instructions provided by the IRS.

As the IRS strives to protect businesses from ERC scams, it underscores the importance of seeking guidance from reputable tax providers before making irreversible decisions. This tailored withdrawal process is crucial for rectifying inadvertent or coerced ERC claims, ensuring a fair and just resolution for affected businesses.

The Employee Retention Credit (ERC) provided crucial support for businesses navigating the challenges of the COVID-19 pandemic and its aftermath. Refund claims for 2020 must be submitted by April 15, 2024, while claims for 2021 have a deadline of April 15, 2025. However, the future of this widely used yet problematic credit is still being determined amid the IRS moratorium on ERC, as it might expire earlier than initially scheduled due to a combination of fraudulent claims, limited IRS resources, and competing priorities for tax legislation funding.

Key Takeaways:

• Moratorium Background and Proactive Measures: The IRS moratorium on processing ERC claims, initiated on September 14, responds to rising concerns about fraudulent filings. This pause aims to safeguard funds allocated for COVID-19 economic relief. Businesses and taxpayers must navigate this pause, considering the significance of the ERC program in their relief strategy.
• Relief Measures for Businesses with ERC Claims: Businesses that submitted ERC claims before the moratorium will see continued processing but with heightened scrutiny. Delays in the processing pipeline and additional scrutiny may lead to prolonged waiting periods for ERC refunds. Accurate and well-documented records are crucial, focusing on key ERC eligibility criteria, categorization, PPP loans, and proper exclusion of owners and relatives.
• IRS Vigilance and Compliance Reviews: The IRS faces a backlog of over 1 million pending ERC claims, leading to a commitment to continued processing for claims submitted before September 14, 2023. Compliance reviews and potential changes in future procedures underscore the IRS’s commitment to enhancing ERC distribution accuracy and integrity. Taxpayers should anticipate evolving procedures and be prepared for potential audits.
• Withdrawal Options, Scrutiny, and Settlement Programs: The withdrawal program and ERC VDP allow businesses to rectify erroneous claims and ensure compliance. IRS vigilance includes scrutiny of claims with potential errors and fraud detection efforts. Businesses that identify inaccuracies in their claims, including those related to specific criteria, can proactively address discrepancies through the withdrawal option or participate in settlement programs, avoiding penalties and legal consequences.

Background On The IRS Moratorium

The IRS decided to stop processing ERC claims in response to growing worries about fraudulent files made under the program. This ban, which takes effect on September 14, is a component of a larger plan to protect the money set aside for COVID-19 economic aid. To maintain the integrity of the initiative, the IRS has been forced to take aggressive steps due to the appearance of individuals who appear to be dishonest and the use of deceptive techniques when submitting ERC claims; taxpayers and businesses requesting relief under the ERC program now must take into account several factors before submitting their claims.

As of October 19, 2023, the IRS had also introduced a withdrawal program. This program allows ineligible taxpayers who have not received or negotiated ERC-related refund checks to withdraw claims for refunds they are not entitled to. Furthermore, on December 21, 2023, the IRS launched the ERC Voluntary Disclosure Program (VDP). This initiative enables taxpayers who have deposited checks to voluntarily return 80% of the refund, protecting IRS audits, penalty assessments, or accruing interest.

Considerations For Businesses With ERC Claims

Businesses/organizations who have already submitted their ERC applications to the IRS feel slightly more at ease. The IRS also promised to keep processing the ERC claims submitted before the moratorium’s implementation (i.e. before 14th September). On the other hand, claims that are presently being processed will be examined more closely. There were frequent delays throughout the ERC process prior to the moratorium. Now that there is more monitoring, taxpayers waiting on ERC refunds should expect more delays. Additionally, claimers may get asked for further supporting paperwork to confirm the veracity of taxpayers’ claims.

This advanced scrutiny highlights the significance of keeping precise and comprehensively documented papers to verify your ERC application. Because the IRS closely examines each claim, all of the data provided in the application must be accurate and verifiable. And if you are reviewing your claim, consider the following key points:

• Review your ERC eligibility, focusing on your gross receipts calculation or partial shutdown due to government mandate criteria.
• Ensure that you were appropriately categorized as a small or large business employee.
• Confirm that you have correctly considered your PPP loan.
• Ensure that owners and relatives are appropriately excluded from the employee calculations.
• Recalculate and file an amended return if necessary.

Understanding The Moratorium – Processing Backlog, Compliance Reviews, And Future Procedures

The IRS is grappling with a backlog of over 1 million ERC claims which remains pending processing. To address this situation, the IRS has committed to continuing to process ERC claims submitted before September 14, 2023. It is essential to note that during the moratorium period, the issuance of refunds for these previously filed ERC claims will occur, but at a slower pace than before. This deceleration in the refund process is attributed to an extended review period by the IRS to ensure comprehensive compliance.

Furthermore, the IRS is set to undertake detailed compliance reviews for the ERC claims still awaiting issuance. Taxpayers who have filed for the ERC may be subject to additional scrutiny, as the IRS reserves the right to request supplementary documentation to validate the legitimacy of the claims. This approach aims to enhance the accuracy and integrity of the ERC distribution process.

Taxpayers must know that the IRS might introduce new procedures for future ERC claims. These adjustments are implemented to streamline the claims process and align with evolving regulations and guidelines.

For individuals who have filed for the but are still awaiting the corresponding refund, an important option is now available to you – the withdrawal option. This withdrawal process is designed to cater to those who, for various reasons, haven’t yet received their ERC refund.

Additionally, the IRS has identified a recurring issue involving businesses that incorrectly attribute ERC claims to supply chain challenges. Businesses invoking supply chain issues as grounds for an ERC claim when their circumstances rarely meet the eligibility criteria have drawn attention from the IRS. In response, the IRS emphasizes that eligibility for the ERC is contingent on specific criteria, and businesses should ensure that their claims align with the established guidelines.

In cases where a business has previously claimed the ERC and the IRS has not processed or paid the claim, there is an opportunity to rectify the situation. Even if the claim is already under or awaiting audit, businesses can withdraw it if they believe it was initially submitted improperly through VDP. This proactive approach allows businesses to address discrepancies and align their claims with the stipulated requirements.

IRS Vigilance: Scrutiny, Withdrawal Option, and the Upcoming Settlement Program for ERC Claims

Comprehensive compliance measures are in place to confirm the accuracy of all the claims. Expert auditors continually examine ERC claims with the greatest chance of error, and the criminal investigation department of the IRS is actively looking for cases of ERC scams and those who support false claims. Fraudulent cases may be reported for possible legal action. Even if businesses think their ERC claims are valid, they should be ready for any audits and investigations.

The withdrawal program is now at your disposal for ERC claims. If you’ve filed an ERC claim and now believe it was in error or wish to pursue it no longer, this provision enables taxpayers to withdraw their ERC claims still in the processing stage. Introducing this withdrawal option allows businesses to rectify any mistakes or reassess their eligibility for employee retention credit. It is a proactive measure, allowing businesses to ensure compliance with the program’s requirements.

To address businesses that have already received an ERC refund but later discovered inaccuracies in their claims, such as:

• Claiming ERC for the fourth quarter of 2021 when the business was operational before 15th February 2020 (as it’s exclusively for Recovery Startup that commenced after this date).
• If Form 941X is filed, discrepancies between the original Form 941 wages and ERC amounts could raise concerns.
• Similarly, filing Form 941X without a deduction for salaries/wages on the originally submitted ITR (applicable to NEC contractors or Form 1099MISC only) is a potential red flag.
• Claiming ERC for Q4 2021 with a three-year average gross receipt exceeding $1 million or basing the claim on general supply chain issues are also flagged.
• Moreover, if ERC amounts for any employee surpass $5,000 in 2020 or a threshold of $21,000 in 2021, it may attract scrutiny.

IRS has launched a VDP program, which allows businesses to voluntarily repay erroneous ERC claims, helping them avoid penalties and future compliance actions. These settlement programs are valuable opportunities for businesses to rectify errors in their ERC claims. They provide a second chance to ensure compliance with IRS guidelines, ultimately helping businesses avoid potential legal consequences.

What Should Businesses Do?

If you submitted your ERC claim early, before the release of any IRS guidance, or if an employer has any concerns regarding any ERC refund claims submitted, the first step is to engage with a tax professional and review it again. This professional can assess whether the claims should be withdrawn or if the funds should be returned through the VDP program.

But, if you’ve submitted an ERC claim and now find it in error or decide not to pursue it, the IRS is currently finalizing details for a special withdrawal option. This provision will enable taxpayers to withdraw their ERC claims, which are still pending processing.

Additionally, prompt action is crucial for employers who have not yet filed ERC refund claims but suspect they might qualify as eligible employers. These businesses should promptly evaluate their eligibility with a trusted tax professional. If deemed eligible, the employer should ensure that all tax returns containing qualified wages are filed via certified mail as soon as possible. This proactive approach can help you prevent potential additional financial consequences by addressing any errors that may exist.

Conclusion

Understanding the moratorium and its implications imposed by the IRS on the ERC requires careful thought and proactive steps. This moratorium, put in place due to concerns about filings, presents a series of challenges for businesses seeking relief. Dealing with backlogs in processing, compliance reviews, and potential procedure changes requires businesses to remain vigilant.

For those who have pending ERC claims, there is some relief in knowing that the IRS is committed to processing claims submitted before September 14, 2023. However, heightened scrutiny and longer review periods mean that you have to have some patience with the current backlog of over 1 million ERC applications. Businesses must maintain accurate records to ensure their ERC claims are legitimate. To rectify any claims and align with guidelines while avoiding consequences, businesses can withdraw their claim or participate in the VDP program.

Seeking assistance from tax professionals for reviews and taking action is crucial to avoid getting into any trouble. Staying well-informed and compliant remains crucial as the IRS continues to refine its approach to handling ERC claims.

The IRS is taking several measures in its ongoing efforts to address false and fraudulent ERC claims. These include an indefinite extension of the moratorium on processing claims, impacting the ERC withdrawal program. Additionally, a legislative deal in progress could conclude the ERC as early as 31st January as part of the 2024 federal budget. Many developments are unfolding concerning the ERC. In this article, we take an in-depth look at the current state of the Employee Retention Credit (ERC).

The Employee Retention Credit, or ERC, created to assist COVID19 impacted employers, has attracted opportunistic consulting firms because of its appeal as a refundable tax credit. While pledging substantial refunds, many entities omit crucial information about wage deduction adjustments and other limitations embedded within the ERC rules.

Due to suspected abuse, the IRS issued a moratorium in the fall of 2023 on accepting new claims while they evaluate their processes. But where does the ERC stand as of now? Let’s see!

Key Takeaways

• IRS Measures and Processing Halt: The IRS has taken steps to address false and fraudulent ERC claims, including an indefinite extension of the processing moratorium. This pause serves the dual purpose of identifying fraudulent claims and managing the millions of claims received over the past three years.
• Legislative Developments and Proposed Changes: A legislative deal in progress, led by Jason Smith and Ron Wyden, proposes changes to the ERC framework. If approved, the proposed legislation could conclude the ERC as of January 31, 2024. The IRS has introduced a VDP and a withdrawal program for taxpayers with ERC claims.
• Eligibility Criteria for ERC: To qualify for the ERC, businesses must meet eligibility criteria based on a significant decline in gross receipts in 2020 or 2021 compared to 2019. The gross receipts test compares the relevant calendar quarter to the same quarter in 2019, with specific thresholds for qualification. The suspension test is satisfied if business operations are fully or partially suspended due to government orders related to the COVID-19 pandemic.
• Penalties for Improper ERC Claims: The IRS actively addresses improper ERC claims through criminal investigations and penalties. Initiatives include a claims withdrawal process, a VDP for acknowledging prior improper claims, and proposed penalties for ERC promoters. Proposed penalties could reach $200,000 or 75% of the ERC promoter’s gross income.

Current State of ERC

Throughout 2023, the Employee Retention Credit (ERC) program remained a significant part of federal employment tax credits. Introduced through the CARES Act in 2020, this refundable credit aimed to assist businesses and tax-exempt organizations affected by the pandemic. It encompasses qualified wages paid by eligible employers from March 13, 2020, to September 30, 2021, which was deemed crucial to support businesses during a challenging period.

Notably, the IRS had halted the processing of ERCs in the fall of 2023. This pause served a dual purpose for the IRS – it aids in identifying a considerable number of fraudulent claims associated with the credit. The IRS has been struggling to keep up with the millions of claims received over the last three years.

By initial revenue estimates, the joint committee initially projected the credit at $86 billion combined for 2020 and 2021. However, as of March 2023, the IRS reported claims exceeding $150 billion, and by October 2023, this figure surged to approximately $230 billion.

According to the most recent news, as of January 16, 2024, a preliminary framework was proposed for tax legislation. Led by Jason Smith and Ron Wyden, this proposal has outlined a framework for managing the completion of the ERC program. The proposed legislation includes substantial changes, with notable modifications to the ERC.  If the proposed legislation is approved, the ERC will cease to exist after January 31, 2024.

Simultaneously, the IRS has introduced a Voluntary Disclosure Program (VDP), enabling taxpayers who have already received ERC refunds to apply until March 22, 2024. This program offers audit certainty in exchange for returning a portion of the refund. Additionally, an ongoing IRS withdrawal program (subject to potential termination) allows taxpayers to withdraw ERC claims yet to be paid by the IRS. With several deadlines approaching, taxpayers must make prompt decisions.

If the proposed legislation is not passed, employers can submit Employee Retention Credit (ERC) claims until April 15, 2024, for the 2020 period and until April 15, 2025, for the 2021 period.

When deciding to file withdrawal pending claims, participate in the ERC VDP, or refund claims, taxpayers must recognize that their eligibility for the ERC remains unchanged since the relevant periods in 2020 or 2021. Despite the current emphasis on fraud highlighted by the IRS, an employer’s qualification hinges solely on applying ERC law, which has remained consistent since 2021. Employers can be eligible in three ways: under recovery startup tax credit, with the gross receipts for the taxable year, or the suspension (government orders) test.

So, Who Really Qualifies?

To qualify for the Employee Retention Credit (ERC), businesses can meet eligibility criteria based on a “significant” decline in gross receipts in 2020 or 2021 compared to 2019. The IRS outlines the gross receipts test, comparing the calendar quarter in question against the same quarter in 2019. In 2020, qualification begins when gross receipts fall below 50% of those in the corresponding 2019 quarter. For 2021, the gross receipts must be less than 80% of the 2019 equivalent.

The suspension test, whether partial or full, is satisfied if the business’s operation is fully or partially suspended in a calendar quarter due to orders from a governmental authority restricting commerce, travel, or group meetings due to the COVID-19 pandemic.

When deciding whether to file, withdraw a refund claim, or engage in the Voluntary Disclosure Program, the safest route (and less likely to trigger an IRS audit) is to assess eligibility for the ERC as per the IRS interpretation. If eligible, disregarding messages about “fraud” and filing for a refund or retaining it if already received is advisable. While an audit may occur, certainty in meeting IRS eligibility criteria justifies the potential inconvenience.

High Penalties for Invalid ERC Claims

The IRS actively seeks measures to address improper ERC claims. These initiatives include more criminal investigations targeting questionable claims audit activities, implementing a claims withdrawal process for pending ERC claims, introducing a VDP for individuals acknowledging prior improper ERC claims, and issuing adjustment proposals through letters.

In the ongoing effort to combat fraud linked to aggressive ERC, promoters aim to strengthen enforcement against inaccurate claims. Existing regulations impose a $1,000 penalty per person assisting in filing an understated tax liability for another. The proposed provision introduces a distinct definition for an ERC promoter and raises the penalty to $200,000 or 75% of the ERC promoter’s gross income.

Conclusion

Deciding on the appropriate course of action becomes challenging when uncertainty exists about qualifying under the IRS’s stringent tests or if there’s an argument for eligibility under the statute but not meeting the IRS’s more rigorous criteria. Individuals falling into these categories should discuss candidly with their tax advisors.

If advisors indicate non-qualification, it’s important to inquire if the decision is based on IRS directives rather than congressional rulings, allowing for an informed choice. One certainty is that missing the deadline for filing a refund claim leaves no room for recourse, even if some IRS guidance faces challenges in court. The end of the ERC could come as soon as January 31st 2024, so be aware of deadlines.

Frequently Asked Questions

If you find yourself among the small business owners anxiously awaiting the processing of your Employee Retention Credit (ERC) claim, you’re part of a sizable group facing the same frustration. The current scenario depicts a staggering Employee Retention Credit backlog of more than a million unprocessed ERC claims! As of the end of November 2023, there are 1.01 million backlog creating substantial delays for businesses in dire need of financial relief.

Expressing concern over this dire situation, Senator Gillibrand took action on May 4th by addressing IRS Commissioner Danny Werfel. She underscored the urgency of the matter and urged Commissioner Werfel to provide a comprehensive update on the IRS’s efforts to tackle this colossal backlog. The growing impatience among small business owners is mirrored in Senator Gillibrand’s proactive approach to ensure accountability and transparency in the resolution of this critical issue.

The magnitude of the backlog raises questions about the IRS’s handling of the ERC program on multiple fronts. Not only did the IRS fall short in promoting the program as directed by the Treasury Department, but it also stumbled in timely and adequate guidance issuance.

Key Takeaways:

• Unprecedented Backlog: The IRS Employee Retention Credit (ERC) backlog has reached a record-breaking one million unprocessed claims as of November 2023, causing substantial delays for small businesses seeking financial relief.
• Challenges in Program Administration: The backlog raises questions about the IRS’s handling of the ERC program, highlighting shortcomings in promoting the program and issuing timely guidance. The administration faced hurdles in reviewing claims, processing, and timely refund issuance, impacting businesses dependent on the ERC during the pandemic.
• Crisis Mitigation Efforts: The IRS responded to a surge in questionable claims by freezing new ERC claims in September 2023. Mitigation efforts include a withdrawal program, voluntary disclosure program, and ongoing handling of claims submitted before the freeze, despite extended processing times due to a significant number of illegitimate claims.
• Root Causes and Legislative Proposals: The backlog is attributed to staffing challenges, underfunding, and outdated technology. Legislative proposals aim to address these issues, including prohibitions on contingency fees for preparers, additional penalties for ineligible claims, and an extension of the statute of limitations. The IRS is incorporating scanning technology to expedite processing and seeking congressional support for enhanced enforcement against fraudulent claims.

Background Of Employee Retention Credit

The ERC made its debut in March 2020, aiming to incentivize employers to retain their workforce during the pandemic. Eligibility for the credit extends until the close of 2021 unless legislative changes intervene. Businesses that qualify, including those that secured a PPP loan, can potentially claim up to 50% of qualified wages, encompassing eligible health insurance expenses. Notably, the Consolidated Appropriations Act (CAA) brought about an expansion of the ERC, allowing eligible employers in 2021 to claim a credit of 70% on qualified wages.

While the ERC’s original intent was commendable—supporting businesses through the pandemic by promoting employee retention—but the IRS has encountered challenges across various facets of the program. It struggled to promote the program as directed by the Treasury Department, falling short in issuing timely and accurate guidance. The establishment of proper procedures to review claims proved to be another hurdle. Presently, there are issues in processing claims and issuing refunds, highlighting a series of shortcomings in the administration of the program.

Employee Retention Credit Backlog Crisis At All-Time High

Due to a notable influx of questionable ERC claims, the IRS took the step of freezing the processing of any new ERC claims in September 2023. In response, the IRS introduced a withdrawal program and a temporary voluntary disclosure program to assist taxpayers who might have inadvertently made an inaccurate claim.

During recent addresses to Congress and a tax conference hosted by the Bar of Washington DC, the IRS Commissioner conveyed that there is currently no specific timetable for lifting the moratorium on processing ERC claims received on or after September 14, 2023. While the IRS is actively handling ERC claims submitted before this date, the Commissioner acknowledged extended processing times due to the substantial number of illegitimate claims. Notably, the majority of ERC claims under review were filed in the three months leading up to September 14, 2023.

The annual report from the NTA sheds light on the ongoing challenges faced by taxpayers in determining ERC eligibility since its inception. The IRS, grappling with both the volume and complexity of the law, has found it challenging to keep up with claims. This has, unfortunately, given rise to numerous scams encouraging businesses to claim credit without due regard to eligibility.

As of the end of November 2023, the backlog of unprocessed Forms 941X at the IRS, primarily representing ERC claims, reached a staggering 1.01 million. This figure marks the highest backlog since the IRS began reporting volumes in 2021, with an increase of nearly 300,000 since the ERC processing moratorium was announced on September 14.

The processing of ERC claims by the IRS has faced significant challenges since the credit’s inception, leading to delays with potential repercussions. Legitimate claims by employers are subjected to extended wait times, potentially causing financial hardships. The IRS is working to distinguish valid claims from those deemed ineligible or potentially fraudulent.

What Is The Reason For This Influx?

Senator Gillibrand attributes the backlog in ERC processing to staffing challenges, chronic underfunding, and outdated technology in a letter addressed to Commissioner Werfel. ERC claims are submitted using Form 941X, specifically the Adjusted Employer’s Claim for Refund or Quarterly Federal Return. Presently, only a paper version of Form 941X is available, and submission is limited to mail, with no electronic filing option. Consequently, each claim requires manual processing, a task managed by only two processing locations.

A September 2022 report from the TIGTA identifies recent legislative changes through the passage of the IIJA Act as a primary contributor to the backlog. The IIJA Act altered certain processes for claims related to recovery startup businesses. However, as outlined in TIGTA’s report, the IRS lacked procedures to verify recovery startup businesses and effective controls to disallow the ERC for non-recovery startup businesses.

Addressing the Challenges and Advancements in ERC Processing

The IRS has incorporated scanning technology to automate the transcription of information that was previously manually entered, successfully digitizing around 1/3 of the ERC return backlog.

The IRS Commissioner has urged Congress to pass legislation aimed at bolstering enforcement against illegitimate ERC claims. The proposed legislation comprises three key elements:

• Prohibiting ERC preparers from charging fees based on a percentage of the claimed ERC amount. The IRS asserts that contingency fees create incentives for preparers to improperly inflate ERC amounts. On the other hand, ERC preparers argue that contingency fees provide greater access to ERC claims as employers may face challenges paying upfront preparation fees.
• Empowering the IRS to impose additional penalties on preparers responsible for ineligible ERC claims. This measure aims to penalize preparers, especially those from ERC “mills,” who may mislead customers by providing advice contrary to their regular tax preparers’ recommendations, as highlighted by North Carolina Senator Thom Tillis.
• Extending the statute of limitations on assessment for ERC claims filed in 2020 and the first two quarters of 2021 from three years to five years. This mirrors a previous extension Congress granted for ERC claims filed in the third and fourth quarters of 2021, also extending the statute of limitations from three to five years.

Additionally, the IRS National Taxpayer Advocate (NTA) is advocating for expedited processing of ERC claims. The NTA’s yearly report to Congress reveals a significant backlog, with approximately 45,000 ERC claims per week received during the two-month period around the start of the moratorium. However, the IRS processed only about 150 claims per week during the same period, resulting in this influx of unprocessed claims, which is projected to rise to nearly 1.3 million by February.

Conclusion

The IRS Employee Retention Credit (ERC) backlog has reached an unprecedented milestone, surpassing one million unprocessed claims as of November 2023. This staggering figure has raised serious concerns among small business owners eagerly awaiting financial relief. Senator Gillibrand’s proactive engagement highlights the urgency of addressing this crisis, emphasizing the need for accountability and transparency in the IRS’s efforts to tackle the colossal backlog.

The backlog crisis underscores multiple challenges in the administration of the ERC program, from the IRS’s failure to effectively promote and guide the program to issues in processing claims and issuing timely refunds. Small businesses, dependent on the ERC for survival during challenging times, face prolonged wait times and financial hardships due to this bureaucratic tangle.

Efforts to address the backlog include a freeze on new ERC claims, the introduction of withdrawal programs, and a temporary voluntary disclosure program. Legislative proposals aim to enhance enforcement against ineligible claims, empower the IRS to penalize preparers and extend the statute of limitations. Despite these measures, the backlog persists, prompting urgent calls for improved processing efficiency and transparency in handling ERC claims.