Analysis by Michael Baer
During the pandemic, the U.S. quickly put together payroll tax-related incentives to encourage employers to not lay off their workers.
One of these measures, the Employee Retention Credit, part of the Coronavirus Aid, Relief, and Economic Security Act (CARES), signed into law by then-President Trump in late March of 2020, was to “provide eligible employers a fully refundable tax credit for employers equal to 50 per cent of qualified wages (including allocable qualified health plan expenses)” paid to workers even though they were not working.
The credit originally could be as much as $5,000 per employee paid for time not worked due to “either (1) a full or partial suspension of operations by order of a governmental authority due to COVID-19, or (2) a significant decline in gross receipts.” The amount was raised to $7,000 per quarter for eligible employers in 2021.
According to the Internal Revenue Service (IRS), employers generally could be eligible to claim the ERC if they:
- were either shut down by a government order due to the pandemic during 2020 and the first three quarters of 2021, or
- experienced the required decline in gross receipts (identified in the law) during that time, or
- qualified as a recovery startup business in the last two quarters of 2021.
While some problems were documented for employers that filed claims during, or shortly after, the period the credit was applied, the early stage of claims filing appeared manageable.
Employers were provided specific instructions designed to walk them through eligibility and qualified wages to claim the credit. Businesses could file claims for the credit using forms to adjust prior year returns until April 15, 2025.
Then, enterprising tax preparers and others initiated “a flurry of aggressive marketing and promotions” in 2022 and 2023—after the credit period was finished—telling employers they could still pursue the credit while charging them fees for doing so.
As a result, millions of late filings came pouring in. An overwhelmed IRS began identifying patterns in many of the newer claims that contained significant errors. In September 2023, the agency halted processing new claims, began to separate legitimate claims from erroneous ones, and offered penalty-free withdrawals of claims that had been filed.
In June 2024, the IRS announced that only 10 per cent to 20 per cent of the more recent claims likely qualified for the credit.
The extra work delayed the processing of proper claims. While the IRS said it “will begin judiciously processing more of these claims,” there is a significant backlash being felt by the agency for taking these actions.
Unfortunately, some smaller employers who counted on the credit to keep their businesses afloat were caught up in the delay and reportedly have gone out of business. Some now seek recompense by suing the IRS, saying the agency overstepped authority in halting claims processing.
What started as a well-intentioned incentive has ended up costing the government and employers dearly due to the apparent rampant abuse of the program.
Analysis by Michael Baer
During the pandemic, the U.S. quickly put together payroll tax-related incentives to encourage employers to not lay off their workers.
One of these measures, the Employee Retention Credit, part of the Coronavirus Aid, Relief, and Economic Security Act (CARES), signed into law by then-President Trump in late March of 2020, was to “provide eligible employers a fully refundable tax credit for employers equal to 50 per cent of qualified wages (including allocable qualified health plan expenses)” paid to workers even though they were not working.
The credit originally could be as much as $5,000 per employee paid for time not worked due to “either (1) a full or partial suspension of operations by order of a governmental authority due to COVID-19, or (2) a significant decline in gross receipts.” The amount was raised to $7,000 per quarter for eligible employers in 2021.
According to the Internal Revenue Service (IRS), employers generally could be eligible to claim the ERC if they:
- were either shut down by a government order due to the pandemic during 2020 and the first three quarters of 2021, or
- experienced the required decline in gross receipts (identified in the law) during that time, or
- qualified as a recovery startup business in the last two quarters of 2021.
While some problems were documented for employers that filed claims during, or shortly after, the period the credit was applied, the early stage of claims filing appeared manageable.
Employers were provided specific instructions designed to walk them through eligibility and qualified wages to claim the credit. Businesses could file claims for the credit using forms to adjust prior year returns until April 15, 2025.
Then, enterprising tax preparers and others initiated “a flurry of aggressive marketing and promotions” in 2022 and 2023—after the credit period was finished—telling employers they could still pursue the credit while charging them fees for doing so.
As a result, millions of late filings came pouring in. An overwhelmed IRS began identifying patterns in many of the newer claims that contained significant errors. In September 2023, the agency halted processing new claims, began to separate legitimate claims from erroneous ones, and offered penalty-free withdrawals of claims that had been filed.
In June 2024, the IRS announced that only 10 per cent to 20 per cent of the more recent claims likely qualified for the credit.
The extra work delayed the processing of proper claims. While the IRS said it “will begin judiciously processing more of these claims,” there is a significant backlash being felt by the agency for taking these actions.
Unfortunately, some smaller employers who counted on the credit to keep their businesses afloat were caught up in the delay and reportedly have gone out of business. Some now seek recompense by suing the IRS, saying the agency overstepped authority in halting claims processing.
What started as a well-intentioned incentive has ended up costing the government and employers dearly due to the apparent rampant abuse of the program.