Navigating the 2024 IRS Scrutiny on the Employee Retention Tax Credit (ERTC)

The Employee Retention Tax Credit (ERTC) was a pivotal support mechanism for businesses during the COVID-19 pandemic, providing substantial financial relief at a critical time. However, as we move into 2024, the IRS has placed the ERTC under intense scrutiny, driven by concerns over widespread misuse and fraudulent claims. This enhanced focus is part of a broader effort by the IRS to restore fairness in the tax system and ensure that businesses claiming the credit do so legitimately.

In this comprehensive guide, we'll delve into the latest developments surrounding the ERTC, the implications of the IRS's heightened enforcement efforts, and how businesses can navigate this new landscape to remain compliant and avoid penalties.

The Evolution of the Employee Retention Tax Credit

The ERTC was introduced as part of the CARES Act in 2020, offering a refundable tax credit to businesses that retained employees during the pandemic. Initially, the credit covered 50% of qualified wages, up to $10,000 per employee annually, but it was expanded under subsequent legislation, including the Consolidated Appropriations Act of 2021 and the American Rescue Plan Act.

These expansions increased the credit to 70% of qualified wages, extended eligibility to more businesses, and raised the cap on qualifying wages to $10,000 per employee per quarter. The result was a significant financial boon for businesses struggling to stay afloat during the pandemic.

However, the rapid expansion and the substantial financial benefits associated with the ERTC also led to widespread abuse. Reports of fraudulent claims began to surface, with businesses and promoters exploiting the system to claim credits they were not entitled to. This prompted the IRS to take action.

IRS Cracks Down on ERTC Fraud in 2024

In response to the surge in fraudulent ERTC claims, the IRS has launched a sweeping effort to audit and investigate claims more rigorously. This effort is part of a broader strategy funded by the Inflation Reduction Act, which provides the IRS with an $80 billion budget increase aimed at enhancing tax enforcement and compliance​​.

ERTC Moratorium: A Temporary Halt to New Claims

One of the most significant developments in this crackdown is the IRS's decision to impose a moratorium on processing new ERTC claims. This moratorium, which began in late 2023, was implemented to allow the IRS to focus on reviewing existing claims and addressing potential fraud.

During this period, businesses cannot file new ERTC claims, and existing claims are subject to heightened scrutiny. The IRS has not provided a specific end date for the moratorium, which means businesses may face delays in receiving their credits even if they are fully compliant.

Enhanced Audits and Investigations

The IRS's enforcement efforts are not limited to the moratorium. The agency has also ramped up audits of businesses that have already claimed the ERTC. These audits are particularly focused on high-value claims and those filed by businesses with complex ownership structures or those flagged by the IRS's data analytics tools as high-risk.

In addition to audits, the IRS has launched criminal investigations into cases of suspected fraud. The IRS Criminal Investigation Division is actively pursuing individuals and businesses that have submitted fraudulent claims, and several high-profile cases have already resulted in significant penalties and criminal charges​.

Understanding the IRS Voluntary Disclosure Program

Given the intense scrutiny surrounding the ERTC, the IRS has introduced the Employee Retention Credit Voluntary Disclosure Program. This program offers a lifeline to businesses that may have inadvertently or intentionally filed incorrect claims.

How the Voluntary Disclosure Program Works

Under the Voluntary Disclosure Program, businesses can voluntarily withdraw their ERTC claims without facing penalties, provided they repay 80% of the claimed amount. This program is particularly beneficial for businesses that realize they may have made errors in their filings or that have concerns about the legitimacy of their claims.

Participating in the program is a proactive way to mitigate the risks associated with an IRS audit or investigation. By coming forward voluntarily, businesses can avoid the more severe consequences that could arise if the IRS discovers discrepancies through its enforcement efforts.

Key Considerations for Businesses

Before participating in the Voluntary Disclosure Program, businesses should conduct a thorough review of their ERTC claims. This review should include:

• Verification of Eligibility: Ensure that your business met the eligibility requirements for the ERTC during the periods for which you claimed the credit.

• Accuracy of Claimed Amounts: Verify that the amounts claimed align with qualified wages and other eligible expenses.

• Documentation: Ensure that all claims are supported by comprehensive documentation, including payroll records, financial statements, and any other relevant documentation.

If you identify errors or have concerns about your claims, it may be in your best interest to participate in the Voluntary Disclosure Program to avoid further complications.

Best Practices for Protecting Your Business in 2024

With the IRS's focus on ERTC compliance, businesses must take proactive steps to protect themselves from audits, penalties, and potential criminal investigations. Here are some best practices to consider:

1. Conduct a Comprehensive Review of Past Claims

   If your business has claimed the ERTC, now is the time to conduct a thorough review of those claims. This review should include verifying that your business met the eligibility requirements, ensuring the accuracy of the amounts claimed, and confirming that you have the necessary documentation to support your claims.

   Consider working with a tax professional who specializes in ERTC to ensure that your review is thorough and accurate. A professional can help identify any potential issues and advise you on the best course of action.

2. Maintain Detailed and Organized Records

   One of the most critical aspects of defending an ERTC claim during an audit is having detailed and organized records. These records should include:

   • Payroll Records: Documentation of all wages paid during the period for which you claimed the ERTC.

   • Financial Statements: Records that support the financial health of your business during the eligibility period.

   • Employee Documentation: Information about employees who were included in your ERTC claim, including their roles, wages, and any other relevant details.

   Keeping these records organized and easily accessible will be crucial if your business is selected for an audit.

3. Stay Informed About IRS Guidance and Updates

   The IRS's approach to ERTC enforcement is evolving, and it’s essential to stay informed about any new guidance or updates from the agency. The IRS regularly publishes updates on its website, and subscribing to IRS newsletters or working with a tax professional can help ensure you’re aware of the latest developments.

4. Consider Legal Counsel for Complex Situations

   If your business is facing an audit or investigation related to the ERTC, or if you have significant concerns about your claims, it may be wise to consult with legal counsel. An attorney who specializes in tax law can provide valuable guidance and representation, helping you navigate the complexities of an IRS audit or investigation.

What’s Next for the ERTC?

As the IRS continues its crackdown on ERTC fraud, businesses should expect increased scrutiny of their claims and potentially longer processing times due to the moratorium. However, the ERTC remains a valuable tool for businesses that legitimately qualify for the credit, and with careful planning and compliance, you can still benefit from this program.

The key takeaway is that the landscape for claiming the ERTC has changed dramatically, and businesses must adapt to these changes by ensuring full compliance with IRS guidelines. Whether through the Voluntary Disclosure Program or by conducting internal audits of your claims, taking proactive steps now can help you avoid the severe consequences of non-compliance.

Conclusion: Navigating the ERTC Landscape in 2024

The IRS’s increased scrutiny of the Employee Retention Tax Credit is a clear signal that the agency is committed to rooting out fraud and ensuring that only eligible businesses benefit from this program. For businesses that have claimed or plan to claim the ERTC, this new environment presents both challenges and opportunities.

On the one hand, the risk of audits, penalties, and criminal investigations has never been higher. On the other hand, businesses that take proactive steps to ensure compliance and rectify any errors in their claims can still benefit from the ERTC while avoiding the pitfalls of non-compliance.

In 2024, the best approach is to stay informed, maintain meticulous records, and seek professional guidance when necessary. By doing so, you can navigate the complexities of the ERTC, protect your business, and continue to thrive in a challenging economic environment.