On September 14, 2023, the Internal Revenue Service took the extraordinary step of imposing an immediate moratorium on the processing of new Employee Retention Credit claims.^[1] The moratorium, announced in IR-2023-169, reflects the IRS's growing alarm at the volume of fraudulent and improper ERC claims that have flooded the agency since aggressive promoters began marketing the credit to businesses that do not qualify. For businesses with legitimate pending claims, the moratorium means significant delays. For those who filed dubious claims at a promoter's urging, it may be the beginning of a much more serious problem.

Background: What Is the Employee Retention Credit?

The Employee Retention Credit was created by the CARES Act in March 2020 as a refundable payroll tax credit designed to encourage employers to keep employees on their payrolls during the COVID-19 pandemic. The credit was subsequently expanded and extended by the Consolidated Appropriations Act of 2021 and the American Rescue Plan Act. For eligible employers, the credit could be worth up to $5,000 per employee for 2020 and up to $7,000 per employee per quarter for the first three quarters of 2021—a potential total of $26,000 per employee.^[2]

To qualify, an employer generally had to demonstrate either that its operations were fully or partially suspended due to a government order related to COVID-19, or that it experienced a significant decline in gross receipts compared to a pre-pandemic baseline. The eligibility requirements are detailed and fact-specific, requiring careful analysis of the employer's particular circumstances during each qualifying quarter.

The Promoter Problem

The ERC's generous dollar amounts attracted a wave of third-party promoters—sometimes styled as "ERC mills"—who aggressively marketed the credit to businesses, often on a contingency fee basis. These promoters typically claimed that virtually every business qualified for the credit, used misleading analyses of the eligibility requirements, and filed claims on behalf of businesses that clearly did not meet the statutory criteria. Some promoters charged fees of 25 to 30 percent of the credit amount, creating enormous financial incentives to file as many claims as possible regardless of their merit.

The IRS warned repeatedly about these promoters. The agency placed the ERC on its annual "Dirty Dozen" list of tax scams for 2023 and issued multiple alerts cautioning businesses to be skeptical of promoters' claims. Despite these warnings, the volume of ERC claims continued to grow, with the IRS receiving hundreds of thousands of claims—many of which, by the agency's own estimate, are ineligible.^[3]

What the Moratorium Means

The moratorium applies to new ERC claims—that is, claims filed on Form 941-X after September 14, 2023. The IRS will not process these new claims until it has developed additional safeguards against fraud. Claims filed before the moratorium will continue to be processed, but the IRS has warned that processing times will be significantly extended, potentially to 180 days or longer, as the agency implements additional review procedures.

The IRS also announced enhanced compliance efforts targeting claims already filed. These efforts include audits of ERC claims, criminal investigations of promoters, and the development of data analytics tools to identify patterns of abusive claims. Employers who claimed the credit based on a promoter's advice should expect heightened scrutiny and should be prepared to substantiate their eligibility with contemporaneous documentation.

The Voluntary Disclosure Option

For employers who have already received ERC refunds but now recognize that they may not have been eligible, the IRS has signaled that a voluntary disclosure program may be forthcoming. A voluntary disclosure program would allow employers to return improperly received credits—potentially at a reduced repayment amount—in exchange for resolution of their liability without penalties or criminal referral. While the details of such a program have not yet been announced, employers who believe their claims were improper should begin consulting with tax counsel now to evaluate their options.

The distinction between voluntary correction and waiting for an audit is significant. An employer who voluntarily comes forward before the IRS contacts them is in a fundamentally different position than one who is caught in an audit. Voluntary disclosure typically results in more favorable treatment—reduced penalties, no fraud penalties, and no criminal referral. Waiting for the IRS to act, by contrast, preserves the possibility of accuracy-related penalties (20 percent of the underpayment), civil fraud penalties (75 percent), and in extreme cases, criminal prosecution.^[4]

What Businesses Should Do Now

For businesses with pending ERC claims that they believe are legitimate, patience is required. The moratorium and extended processing times are frustrating, but businesses with well-documented, meritorious claims should ultimately receive their credits. In the meantime, businesses should ensure that their documentation is in order: records of government orders that affected operations, gross receipts calculations showing the required decline, payroll records identifying the wages for which the credit is claimed, and any analysis prepared at the time the claim was filed demonstrating eligibility.

For businesses that filed claims based on a promoter's advice and are now uncertain about their eligibility, the time to seek independent review is now—before the IRS contacts them. An independent review by qualified tax counsel (not the promoter who filed the claim) can assess whether the claim is supportable and, if it is not, what steps should be taken to minimize the employer's exposure. The cost of an independent review is a fraction of the potential liability for an improper claim, which includes not only repayment of the credit but also penalties and interest that can substantially exceed the original credit amount.^[5]