On September 14th the Internal Revenue Service (“IRS”) announced a moratorium on the processing of Employee Retention Credit (“ERC”) claims received on or after September 14, 2023, such that they will not begin to process these claims until at least January 2024, while they will continue to process claims received prior to September 14, 2023, albeit at a slower pace (see IRS announcement). The IRS indicated that it enacted the moratorium to add more safeguards, prevent future abuse, and protect unknowing business owners from firms with predatory tactics and aggressive marketing.
The IRS has also announced pending programs that will allow victims of ERC service providers that use aggressive and predatory tactics (so-called, “ERC mills”) to withdraw ERC claims or to repay inappropriately received ERC funds. As most business owners can attest, these ERC mills are likely flooding your email, text, TV/radio channels, and voicemail inboxes with ERC solicitations and, in some cases, even leveraging celebrity endorsements. The IRS has been determined to crack down on scams promoted by ERC mills and has included “aggressive [ERC] pitches from scammers” on its annual list of the “Dirty Dozen” tax scams.
Sagemont Tax’s leadership team of tax and legal professionals has been consistently outspoken against ERC mills (see ERC Mill Warning and Moral Hazard), and the aggressive eligibility positions they have pushed on unsuspecting clients (see Supply Chain and our quote in Tax Notes). To our dismay, these bad actors, with their misleading practices and unfounded promises, have put a permanent stain on this COVID-19 stimulus program that has been an important lifeline for so many businesses negatively impacted by the pandemic.
Although the processing delays are unfortunate for ERC claimants with properly analyzed and deserving claims, Sagemont Tax is supportive of the IRS’ efforts to (i) dissuade unsuspecting business owners from falling victim to unqualified and uncredentialed ERC mills and (ii) urge business owners to only seek ERC advice from licensed and credentialed tax professionals with the requisite experience.
In tandem with the announcement, the IRS also released an eligibility checklist (ERC Eligibility Checklist | Internal Revenue Service (irs.gov)) to help taxpayers better determine ERC eligibility. Sagemont Tax’s key takeaways from the checklist and updated IRS guidance are as follows:
Fraud and Abuse – The IRS’ news release indicated that the IRS criminal investigation division has initiated 252 investigations where filers have obtained over $2.8 billion of refunds related to potentially fraudulent ERC claims. The fraud and abuse being investigated likely exceeds merely taking a liberal interpretation of ERC eligibility guidelines (as many ERC mills do) and instead manifests itself in: (i) knowingly taking the ERC on behalf of companies that never truly existed or were not in existence during the pandemic; (ii) fraudulently inflating the number of employees or amount or wages paid to such employees to increase an ERC amount; and/or (iii) otherwise falsifying payroll documentation to manufacture, or increase the magnitude of, an ERC claim to which such business in not truly entitled.
Sagemont Tax takes extensive measures to ensure that the ERC claims for which we file are properly made and based on substantiated data. We substantively review our clients’ historical tax records directly with the IRS to ensure we are working with real companies that legitimately paid W-2 wages during the relevant ERC eligibility periods.
Supply Chain Disruptions – As is evident from Question 6 of the new IRS checklist, as well as the IRS’ recent generic legal memorandum (see IRS Hard Line), the IRS is fed up with ERC mills using supply chain disruptions as a universal path to ERC eligibility for all.
Sagemont Tax does not support these supply chain positions or use them as a basis for substantiating eligibility for our clients. We have expanded in great detail on this position in a technical article written in November 2022, and we were subsequently quoted in Tax Notes commending the IRS on their hard line against this position.
Government Recommendations vs. Orders – The IRS is also focused on cracking down on claims where eligibility periods are stretched into periods where there were no longer COVID-19-related governmental orders in place. This approach is often taken by ERC mills who erroneously argue that CDC guidance or the OSHA general duty clause constitute “governmental orders” under the ERC.
Sagemont Tax agrees with the IRS’ position that CDC, OSHA, and state or local recommendations may not be used to substantiate an ERC eligibility claim (with limited healthcare-industry-specific exceptions). Our firm’s position was also explained and documented in the Supply Chain article referenced above.
Using a Tax Professional vs. an ERC Promotor – The IRS has once again urged businesses to “seek out a trusted tax professional who actually understands the complex ERC rules” (as opposed to a tax promoter or marketing firm) and to carefully review the ERC guidelines when evaluating eligibility for the ERC.
Sagemont Tax is owned, managed, and operated by licensed, credentialed, and highly experienced tax professionals and attorneys who are deeply involved in every client file from start to finish. Our tax professionals bring decades of real-world tax advisory and accounting experience to our clients and are deeply engrained in all of our client files. Sagemont Tax is a tax advisory firm at heart and operates with quality and integrity at the forefront of all client engagements.
Additional color presented by the IRS in the pronouncement related to this moratorium simply repeats, albeit with much greater emphasis, warnings and positions that have been previously stated. Although the moratorium may have the undesirable effect of delaying properly analyzed and deserving claims, we share the IRS’ growing frustration with the negative effect ERC mills are having on a well-intentioned program meant to help small businesses retain talent. We fully support the IRS’ decision to institute a more potent approach to compel business owners to avoid ERC mills and only seek ERC advice from trusted tax professionals.
For more information about these developments, please contact a member of Sagemont Tax management at management@sagemonttax.com. Additionally, please reach out should you have any concerns about a previous ERC filing with another provider or want to discuss a second look at your ERC claim. We strongly urge businesses considering applying for ERC to seek out a qualified advisor who understands the complex ERC rules and is comprised of trusted tax professionals.
For CPAs with several ERC-eligible clients, Sagemont Tax offers a referral program.
ERC services should indisputably be provided by a firm composed of experienced, credentialed, and licensed tax, accounting, and legal professionals. This is why Referral Partners come to Sagemont Tax.
Sagemont Tax’s executive leadership team is composed of CPAs and attorneys with big firm experience (Big Four, Big Law, and Top 25 global consulting firms) and decades of experience in both advising taxpayers on complex tax transactions and tax positions, as well as representing clients in front of the IRS.
