Last month, the Internal Revenue Service (IRS) announced a moratorium on processing any Employee Retention Credits (ERC) because it had discovered widespread fraud and misrepresentation of the ERC program. For businesses and organizations which currently have an application in for these credits, they will still be processed, albeit slower and with a more thorough look at the applicant’s information and eligibility.
The ERC is a COVID-19 era program, which, like some other programs set up to help ameliorate the economic damage done by the COVID-19 pandemic, has become a target for scams or misrepresentation. This has put many unsuspecting businesses and organizations in a difficult and possibly financially untenable situation where they have to repay the ERC money they received.
If you have applied for this program for your nonprofit and are unsure or worried you may have done so in error, you can withdraw your claim. If you want to know more about the program and how it reached this point, we’ve put together a brief history outlining the purpose, changes, and recent issues.
What is the ERC?
The ERC was part of the 2020 Coronavirus Aid, Relief, and Economic Security (CARES) Act, and was designed to allow businesses that had kept staff employed during the pandemic to obtain a tax credit for their wages and benefits. The initial program gave organizations a tax credit equal to 50% of paid wages during 2020, up to $10,000 per employee per year.
The next year, the Consolidated Appropriations Act raised this percentage to 70%, and the amount to $10,000 per employee per quarter. Finally, the American Rescue Plan Act of 2021 extended the program through the end of 2021.
Who can get the ERC?
The ERC is available to businesses and nonprofit organizations, including churches. These organizations must fit a set of criteria, as follows:
- Organizations that had to shut down due to the COVID-19 pandemic during 2020 or the first three quarters of 2021.
- Organizations that experienced a decline in gross receipts (50% in 2020, 20% in 2021) during 2020 or the first three quarters of 2021.
- Organizations that qualify as a recovery startup business for the third or fourth quarters of 2021.
However, organizations enrolled in the Paycheck Protection Program (PPP) cannot use payroll that was covered by a loan from this program. You can still apply for ERC if you are enrolled in PPP.
To put it more simply, the ERC is intended to be used by employers that continued paying employees despite losing revenue or shutting down entirely because of government quarantine or lockdown orders. The payroll taxes paid for those employees can be used to earn a tax credit. The intent is to make it easier for businesses to keep their staff employed and to help them recover from the costs of shutting down or losing revenue.
Why has the IRS announced a moratorium on this program?
As time has gone on and we’ve moved further and further away from the pandemic, the number of fraudulent ERC claims has grown. The IRS has become aware of a number of illicit actors who aggressively promote the program to organizations as an easy way to get a tax credit from the government. These actors engage in cold-calling, direct mail marketing, and other forms of spam in order to trick organizations into signing up.
These illicit promoters push organizations to apply with their help and demand a substantial contingency fee once the organization receives its ERC credit. However, many of these organizations do not do their due diligence to see if they qualify, and many later must pay the credit back to the IRS once the fraud has been discovered.
In order to curb these fraudulent actors, the IRS has stopped processing new applications and has opened multiple investigations into past claims.
If your nonprofit organization is concerned about falling victim to this scam or you have been getting contacted about applying for ERC, here are some warning signs that they might be an “ERC mill”:
- Promising a simple and easy application process, while giving you very little in detail.
- Demanding a fee upfront for help with the ERC application process.
- Claiming that there are no consequences to receiving the credit, “nothing to lose” by applying.
- Claiming that you already qualify without knowing anything about your organization or finances.
- Claiming that issues unrelated to COVID-19 still qualify you for the ERC, including supply chain issues.
What do you do if you think you might qualify or have already applied?
The moratorium is running until “at least December 31st”, which means it could be extended into the first quarter of 2024 or beyond.
If your organization has filed an ERC already, the IRS will be processing it with some added attention paid to the qualifications. This means it will likely take longer.
If you have not applied for an ERC but would like to, you will have to wait the moratorium out.
In both cases, the added time is a great opportunity to do what the IRS recommends and to reach out to a tax expert to look at your finances from 2020 and 2021. Despite what the “ERC mill” marketing says, the ERC is a highly complex tax credit, and is only worth investing time in if it makes sense for your organization. As a nonprofit leader, you know the importance of seeking out every source of funding you can find, but an improperly filed or fraudulent ERC would require you to pay it back with interest and penalties.
We’re here to help you move forward
We at 501(c) Services are deeply familiar with the challenges nonprofits face, and we know that there is no easy path to additional funding, tax credits, or any other resource. We understand that your work is one of passion for your cause and our organization is dedicated to helping you see your projects through by identifying areas where you can save money. If you’d like to learn more about our services, get in touch with us.
501(c) Services has more than 40 years of experience helping nonprofits with unemployment outsourcing, reimbursing, and HR services. Two of our most popular programs are the 501(c) Agencies Trust and 501(c) HR Services. We understand the importance of compliance and accuracy, and we are committed to providing our clients with customized plans that fit their needs.
Contact us today to see if your organization could benefit from our services.
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The information contained in this article is not a substitute for legal advice or counsel and has been pulled from multiple sources.