It’s been more than 18 months since one of Michael Garcia’s clients applied for an Employee Retention Credit and it’s still not clear when – or if – the company will ever receive the funds.
The Employee Retention Credit is a refundable tax credit that was established through the Coronavirus Aid, Relief and Economic Security Act to provide relief for businesses that kept employees on their payrolls during the COVID-19 pandemic, says Garcia, a partner in the enterprise solutions group for Providence-based Kahn, Litwin, Renza & Co.
Garcia says his client, an event planning company, had generated the credit in 2021 and applied for it in 2022 as the business has struggled to recover from the COVID-19 pandemic. To make matters worse, the company has lost money through the process since it’s been required to pay taxes on the hundreds of thousands of relief funds that it applied for.
“This is a company that is reinventing the wheel every few months to make sure that they’re keeping the doors open,” Garcia said. “Their business still hasn’t bounced back since there’s not as many live events as there were previously, and this money will go a long way to helping their operations.”
But the company’s situation is not unusual. Garcia and his colleague, Anthony Mangiarelli, say they’ve worked with hundreds of companies they are confident qualify for COVID-19 relief funds but are financially struggling as they wait for their applications to be processed.
“We’ve got clients waiting on some big dollars,” said Mangiarelli, who is also a partner and director in the enterprise solutions group for KLR. “Business expansion plans have been put on hold, [there’s been] cuts in employees and selling of assets – it impacts small businesses.”
Across the U.S. there are hundreds of thousands of other business owners currently facing a similar cash crunch while waiting for relief. At the root of these delays has been an influx of ineligible and fraudulent Employee Retention Credit claims submitted that has caused the IRS to pause processing applications.
Since the Employee Retention Credit launched in 2020, many companies have been the target of a variety of pop-up marketers advising them to apply for the credit when they may not technically qualify.
Accountants agree that it’s best for business owners seeking credit to consult professionals because it can be complicated to determine whether a company qualifies. Mangiarelli says a company must meet one of two requirements to be eligible.
One criterion is if the business had at least a 50% decline in gross receipts in the second or third quarter of 2020 compared with the same quarter in 2019 and a greater than 20% drop in gross receipts between the fourth quarter of 2020 through the third quarter of 2021 compared with the same period in 2019-2020. The second way to be eligible is if a company can prove it was affected in certain ways by any qualified government shutdown order, Mangiarelli said.
Carrie Gizienski, tax director at CBIZ & MHM New England, says her clients have been “inundated” with calls, emails and even letters designed to look like official IRS documents from a variety of marketers.
Like many accountants, Gizienski says she has been busy the past few years assisting her clients through the process of sifting through these illegitimate marketing messages and determining if they qualify for relief.
The IRS has also been warning the public about Employee Retention Credit scammers for months. But the issue came to a head in September when the federal agency announced it would stop processing ERC claims until at least the end of the year “to protect honest small-business owners from scams.”
The revenue service said payouts for the claims would continue during the pause but at a slower pace with an updated standard process goal of 180 days, compared with the previous target of 90 days.
Then, in another effort to safeguard businesses from scams, the IRS announced in October that it would offer a withdrawal process for those who had filed an Employee Retention Credit claim but had not yet received a refund. Meaning that those who are concerned about the accuracy of their claim can withdraw it and have it treated as if it was never filed.
“The aggressive marketing of these schemes has harmed well-meaning businesses and organizations, and some are having second thoughts about their claims,” IRS Commissioner Danny Werfer wrote in an Oct. 19 statement. “We want to give these taxpayers a way out.”
The IRS added it would not impose penalties or interest on withdrawn claims; however, those who “willfully” filed, assisted or conspired in submitting fraudulent claims may still face criminal investigation and prosecution.
While it’s still unclear when or if the IRS will finish processing the claims, there are still actions business owners who have filed an Employee Retention Credit can take.
Gizienski recommends that companies ensure they have the proper documentation prepared just in case their claim gets audited. The documents a business owner would need are those showing how they qualified and the calculations of their credit.
Mangiarelli says he expects companies that have filed a claim through a different firm will start seeking second opinions and assistance with defending claims in IRS audits.
Overall, Garcia and other accountants recommend any business owner who has questions or concerns about applying for the Employee Retention Credit speak with a certified tax professional.
