advocacy

Weekly Legislative Update
August 7, 2023

IRS Invites Public Input on Ways to Improve Dispute Resolution Programs; Suggestions Wanted

The Internal Revenue Service has invited public input on improvements to certain post-filing alternative dispute resolution (ADR) programs currently offered to taxpayers.

“The IRS is greatly interested in examining ways to help to reduce the time, costs and administrative burden for taxpayers and the government in resolving tax disputes,” said Andy Keyso, Chief of the Independent Office of Appeals. “We’re open to all suggestions about how to better use ADR techniques to help expedite their fair resolution.”

The IRS is committed to resolving disputes with taxpayers without a costly legal process whenever possible. The Inflation Reduction Act Strategic Operating Plan (initiative 2.4) emphasizes improvements to tax certainty programs that help taxpayers resolve compliance issues quickly and with finality.

Available ADR programs

ADR programs can be important tools for resolving tax disputes efficiently without litigation in a way that is fair and impartial to taxpayers and the government.

Over the past two decades, the IRS has offered four principal post-filing ADR programs:

  • Fast Track Settlement (FTS) - available to taxpayers under audit and in the jurisdiction of Large Business & International (LB&I), Small Business and Self Employed (SB/SE), or Tax Exempt and Government Entities Division (TEGE). Under FTS, an independent Appeals mediator assists the taxpayer and the IRS to try to reach an agreement on disputed issues, facilitating settlement discussions and offering settlement proposals.
  • Fast Track Mediation - Collection (FTMC) - available for certain collection cases and issues to help taxpayers resolve disputes resulting from Offers in Compromise and Trust Fund Recovery Penalties. Collection Due Process cases and cases worked at a Collection Campus site are some of the cases excluded from FTMC. Under FTMC, an independent Appeals mediator assists the taxpayer and the IRS to try to reach an agreement on disputed issues.
  • Rapid Appeals Process (RAP) - available to most LB&I cases or SB/SE estate and gift cases. It consists of a pre-Appeals conference in which IRS Appeals utilizes mediation techniques to try to resolve unagreed issues while the case is in Appeals’ jurisdiction. RAP enables taxpayers and Exam to work together to expedite the resolution of unagreed issues in Appeals and is meant to be completed in one conference.
  • Post Appeals Mediation (PAM) - available if IRS Appeals settlement discussions are unsuccessful and the remaining disputed issues are fully developed. Cases for which tax disputes have been previously mediated through a different ADR program, such as through FTS, are ineligible for PAM. PAM is available to resolve disputed tax issues that originate from an IRS audit or to resolve disputed tax issues that originate through IRS tax collection actions.

The IRS is interested in suggestions to improve the administration of these ADR programs and in proposals for other approaches to ADR that can increase the use and efficacy of ADR in the resolution of tax disputes.

Public input sought on ADR programs

The IRS welcomes comments on all aspects of alternative dispute resolutions practices to help inform IRS policies for improving taxpayer service and resolving issues and cases fairly and expeditiously.

The IRS particularly welcomes thoughts on:

  • Reasons taxpayers choose not to use these ADR programs (e.g., Fast Track Settlement - see LB&I FTS, SB/SE Examination FTS, and TEGE FTS; Fast Track Mediation – Collection; Rapid Appeals Process - see RAP; and Post Appeals Mediation - see PAM), and potential modifications to these programs that can remedy taxpayer concerns.
  • Issues that are currently excluded from these ADR programs that should not be excluded.
  • Other ways in which these ADR programs could be improved.
  • Suggestions for how best to educate taxpayers and representatives about these ADR programs.
  • Experiences with the use of mediators from the IRS Independent Office of Appeals, and suggestions for how Appeals can ensure that mediators promote an ADR engagement that is conducive to settlement.
  • Suggestions for how best to extend the use of these or other ADR programs to taxpayer segments that may be less aware of, or familiar with, ADR, such as small business and low-income taxpayers, and whether any unique characteristics of these segments necessitate modified ADR procedures.
  • Feedback about experiences with the IRS when ADR programs were offered or not offered by IRS personnel or were denied when requested by taxpayers.
  • Feedback about whether there are types of cases where ADR has proven particularly useful (e.g., valuation cases) and, if so, how ADR use can be increased in these types of cases.
  • Ideas to achieve tax certainty or resolution sooner beyond these existing ADR programs, including ideas for new ADR programs.

All comments beyond the items listed above are welcome. Public comments can be sent to ap.adr.programs@irs.gov by Aug. 25, 2023.

 

IRS Commissioner Signals New Phase of Employee Retention Credit Work; with Backlog Eliminated, Additional Procedures Will be Put in Place to Deal with Growing Fraud Risk

With the Internal Revenue Service making substantial progress in the ongoing effort related to the Employee Retention Credit claims, Commissioner Danny Werfel said the agency has entered a new phase of increasing scrutiny on dubious submissions while renewing consumer warnings against aggressive marketing.

Speaking recently at a special roundtable session of tax professionals in Atlanta, Werfel noted the IRS has shifted efforts after successfully clearing the backlog of valid Employee Retention Credits (ERC) claims.

Now, the agency is intensifying compliance work and putting in place additional procedures to deal with fraud in the program.

Werfel told a group of tax professionals dealing with fall-out from aggressive ERC claims that the IRS has increased audit and criminal investigation work on these claims, both on the promoters as well as those businesses filing dubious claims.

“The further we get from the pandemic, we believe the percentage of legitimate claims coming in is declining,” Werfel told attendees at the IRS Nationwide Tax Forum in Atlanta. “Instead, we continue to see more and more questionable claims coming in following the onslaught of misleading marketing from promoters pushing businesses to apply. To address this, the IRS continues to intensify our compliance work in this area.”

The Employee Retention Credit, also sometimes called the Employee Retention Tax Credit or ERTC, is a tax credit enacted to help businesses during the pandemic that was subsequently amended three times by Congress. Many businesses legitimately apply for the credit, but aggressive marketing has overshadowed the program. The period of eligibility for the credit for affected businesses is very limited, covering only between March 13, 2020, and Dec. 31, 2021.

Under the current law, businesses can typically continue to file claims for the credit until April 15, 2025. That raises future concerns, Werfel said.

“The amount of misleading marketing around this credit is staggering, and it is creating an array of problems for tax professionals and the IRS while adding risk for businesses improperly claiming the credit,” Werfel said. “A terrible scenario is unfolding that hurts everyone involved -- except the promoters.”

“This was not how the law was meant to work, and Congress can help with this situation,” Werfel added. “We will work with Treasury to explore legislative solutions we can share with Congress to help address fraud and error, including potentially putting an earlier ending date for businesses to claim the credit and increase IRS oversight of return preparers.”

The IRS continues to urge businesses, tax-exempt organizations and others considering applying for this credit to carefully review the official requirements for this limited program before applying. In the meantime, the IRS continues to intensify compliance activities involving ERC claims.

With more than 2.5 million claims coming in since the program was enacted IRS claims processing slowed due to the complexity of the amended returns. The IRS has made substantial progress on these claims this year, with 99 percent of claims approximately three months old as of mid-July. The additional effort has been critical in helping legitimate businesses receive the money they can claim legally under the law. 

However, the IRS has growing concerns about scams and potential fraud within the ERC program given the troubling increase in false and misleading public advertisements and scams taking advantage of taxpayers.

The IRS has trained auditors examining ERC claims posing the greatest risk, and the IRS Criminal Investigation division is working to identify fraud and promoters of fraudulent claims.

The IRS reminds anyone who improperly claims the ERC that they must pay it back, possibly with penalties and interest. A business or tax-exempt group could find itself in a much worse cash position if it has to pay back the credit than if the credit was never claimed in the first place. So, it’s important to avoid getting scammed.

When properly claimed, the ERC is a refundable tax credit designed for businesses that continued paying employees during the COVID-19 pandemic while their business operations were fully or partially suspended due to a government order or that had a significant decline in gross receipts during the eligibility periods. The credit is not available to individuals.

To help tax professionals and others, the IRS continues to provide additional legal clarity around ERC rules. On July 20, the IRS issued a legal advice memorandum applying the statutory requirements to five different scenarios. The memorandum highlighted that employers experiencing supply chain disruptions qualify for ERC only if they had to suspend their business operations because their suppliers were unable to provide critical goods or materials due to a government order that caused the supplier to suspend its operations. Contrary to advice given by unscrupulous preparers, this guidance makes clear that supply chain disruptions do not qualify an employer for the credit unless they are due to a government order.

Werfel told Tax Forum participants the IRS remains deeply concerned about the impact of the ERC on tax professionals who are doing the right thing while their clients are being lured by aggressive marketing claims.

“Hard-working tax professionals who play by the rules see their clients go elsewhere, lured by false promises and wild exaggerations,” Werfel added. “The resulting number of claims prevents the IRS from doing other priority work. But the biggest risk is being taken by the promoters pushing these schemes and businesses filing these claims. This is an area where we urge caution; those improperly claiming the credit could face follow-up action from the IRS.”

Warning signs of aggressive ERC marketing

There are important tips that people should be wary of involving the Employee Retention Credit. Warning signs to watch out for include:

  • Unsolicited calls or advertisements mentioning an “easy application process.”
  • Statements that the promoter or company can determine ERC eligibility within minutes.
  • Large upfront fees to claim the credit.
  • Fees based on a percentage of the refund amount of Employee Retention Credit claimed. This is a similar warning sign for average taxpayers, who should always avoid a tax preparer basing their fee on the size of the refund.
  • Preparers refusing to sign the ERC return being filed by the business, exposing just the taxpayer claiming the credit to risk.
  • Aggressive claims from the promoter that the business receiving the solicitation qualifies before any discussion of the group's tax situation. In reality, the Employee Retention Credit is a complex credit that requires careful review before applying.
  • The IRS also sees wildly aggressive suggestions from marketers urging businesses to submit the claim because there is nothing to lose. In reality, those improperly receiving the credit could have to repay the credit – along with substantial interest and penalties.

Unscrupulous promoters may lie about eligibility requirements, including refusing to provide detailed documents supporting their computations of the ERC. In addition, those using these companies could be at risk of someone using the credit as a ploy to steal the taxpayer's identity or take a cut of the taxpayer's improperly claimed credit.

How the promoters lure victims

The IRS continues to see a variety of ways that promoters can lure businesses, tax-exempt groups and others into applying for the credit.

  • Aggressive marketing. This can be seen in countless places, including radio, television and online as well as phone calls and text messages.
  • Direct mailing. Some ERC mills are sending out fake letters to taxpayers from the non-existent groups like the "Department of Employee Retention Credit." These letters can be made to look like official IRS correspondence or an official government mailing with language urging immediate action.
  • Leaving out key details. Third-party promoters of the ERC often don't accurately explain eligibility requirements or how the credit is computed. They may make broad arguments suggesting that all employers are eligible without evaluating an employer's individual circumstances. 
  • For example, only recovery startup businesses are eligible for the ERC in the fourth quarter of 2021, but promoters fail to explain this limit.
  • Also, the promoters may not inform taxpayers that they need to reduce wage deductions claimed on their business' federal income tax return by the amount of the Employee Retention Credit. This causes a domino effect of tax problems for the business.
  • Payroll Protection Program participation. In addition, many of these promoters don't tell employers that they can't claim the ERC on wages that were reported as payroll costs to obtain Paycheck Protection Program loan forgiveness.

 

How businesses and others can protect themselves

The IRS reminds businesses, tax-exempt groups and others being approached by these promoters that there are simple steps that can be taken to protect themselves from making an improper Employee Retention Credit.

  • Work with a trusted tax professional. Eligible employers who need help claiming the credit should work with a trusted tax professional; the IRS urges people not to rely on the advice of those soliciting these credits. Promoters who are marketing this ultimately have a vested interest in making money; in many cases they are not looking out for the best interests of those applying.
  • Request a detailed worksheet explaining ERC eligibility and the computations used to determine the ERC amount.
  • Don't apply unless you believe you are legitimately qualified for this credit. Details about the credit are available on IRS.gov, and again a trusted tax professional – not someone promoting the credit – can provide critical professional advice on the ERC.

To report ERC abuse, submit Form 14242, Report Suspected Abusive Tax Promotions or Preparers. People should mail or fax a completed Form 14242, Report Suspected Abusive Tax Promotions or Preparers, and any supporting materials to the IRS Lead Development Center in the Office of Promoter Investigations.

Mail:

Internal Revenue Service Lead Development Center

Stop MS5040

24000 Avila Road

Laguna Niguel, California 92677-3405

Fax: 877-477-9135

Properly claiming the ERC

There are very specific eligibility requirements for claiming the ERC. These are technical areas that require review. Employers can claim the ERC on an original or amended employment tax return for qualified wages paid between March 13, 2020, and Dec. 31, 2021. However, to be eligible, employers must have: