The Employee Retention Credit (ERC) was established in 2020 and 2021 as part of the CARES Act in response to the global COVID-19 pandemic. Its primary purpose was to assist struggling businesses in paying for employees who were ineligible for the Paycheck Protection Program (PPP) forgivable loans Above the Law article.
Unfortunately, the ERC faced criticism from the IRS as many eligible businesses failed to claim the credit initially, often waiting until the last minute. This resulted in a large influx of credit requests and led the IRS to impose a temporary halt on the processing of ERC claims.
To qualify for the ERC, businesses must either suffer a “significant decline in gross receipts” or experience a full or partial suspension due to COVID-19 government shutdown orders. However, the ambiguities in these rules coupled with a lack of awareness amongst businesses led to many not claiming the ERC initially.
The IRS released Notice 2021-20 to clarify many frequently asked questions about qualifying governmental orders and the meaning of a business suspension for ERC purposes. Yet, many questionable decisions remain. For instance, the IRS did not consider a business suffering a full or partial suspension if it was due to reduced customer demand because of a government-imposed stay-at-home order. This policy effectively placed the burden of proof on ERC claimants, perhaps more efficiently handled by the IRS.
The IRS has also said that employers who received forgivable loans through the PPP cannot use those funds as wages for claiming the ERC. This, alongside the recent surge of ERC mills, which promise large refunds for high fees and often take aggressive positions on ERC claims, led to the proliferation of questionable ERC claims. In response, the IRS introduced a moratorium on new ERC claims on September 14, 2023.
Following these complications, Congress is now contemplating ending the ERC program and is considering H.R. 7024, which would set a deadline for ERC claims to January 31, 2024.
While the ERC was founded with noble intentions during the COVID-19 pandemic, it’s clear that practical implementation has been problematic. There’s a consensus that future pandemic relief efforts should learn from these ERC issues, ensuring a smoother experience for businesses and individuals while reducing fraud possibilities.