Authored by RSM US LLP
The employee retention credit (ERC or ERTC) was originally enacted in the CARES Act in March of 2020 at the onset of the COVID pandemic. Congress acted quickly by enacting this credit to get money in the hands of employers who were continuing to pay employees despite being affected by COVID mitigation measures. Specifically, those effects were a significant decline in gross receipts (which is objective) or a full or partial suspension from government orders (which is very subjective).
Over time, the credit has been changed, and many businesses have been filing. Though the ERC ended for most on Sept. 30, 2021, many businesses continue to file because the statute of limitations is still open. Specifically, the statute for 2020 claims ends April 15, 2024 (taxpayers have another year beyond that for 2021 claims).
Determining eligibility is complex and includes careful analysis and calculation of qualified wages.
On Sept. 14, the IRS will discontinue processing claims for the remainder of 2023 in an attempt to limit fraudulent activity in the employee retention credit market. The IRS hopes this measure will reduce the number of fraudulent claims encouraged by third-party providers.
We expect there will be significant delays in processing ERC claims in 2024 when the IRS resumes processing procedures.
The announcement is also significant for those taxpayers who have already filed ERC refund claims but should not have due to ineligibility. Additional procedural guidance from the IRS is expected to allow taxpayers the ability to withdraw claims that have not been processed.
Further, the IRS also intends to provide guidance for those who have received refunds in error, who want to pay them back to avoid penalties and future compliance action.
First, and most importantly, employers should work with their trusted tax professional.
The IRS provides some red flags for recognizing some of the aggressive promoters which include:
Companies that did engage parties like this should have tax professionals review their substantiation to determine whether it appears to be valid or outside the provided guidance. The IRS published some guidance in July 2023 on supply chain impacts, for example, and in cases where employers were claiming a partial suspension from supply chain impacts, the IRS is expecting to see support of specific government orders and substantiation that suppliers were impacted by those orders. This is only one area of possible impact, but it’s an example of what employers need to be prepared for if the IRS reviews their claim.
Many employers, even with valid claims, are still waiting for refunds. These entities should expect more delays in processing (even beyond what we were experiencing before) and possibly will receive additional questions from the IRS. In some cases, such entities may be pulled for exam before the IRS issues a refund. The IRS can also commence examination even after the refund is issued.
Also, taxpayers need to be aware that even if a refund is issued, if it is later deemed invalid, the IRS has two years from the date the refund was issued to commence erroneous refund claim action. Erroneous refunds are subject to a 20% penalty.
The IRS is expected to provide additional guidance for taxpayers about how to withdraw or amend an ERC claim.
If you choose to withdraw your ERC claim or pay back a previously received credit, work with a qualified tax professional to ensure the appropriate steps are taken to protect yourself from potential penalties or interest.
This article was written by Anne Bushman, Alina Solodchikova and originally appeared on 2023-09-19.
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