On March 7, 2023, the IRS issued a renewed warning to employers considering an Employee Retention Credit (“ERC”) claim.
The ERC was adopted as part of the Coronavirus Aid, Relief, and Economic Security Act in 2020, and was modeled on a similar credit that had been adopted following natural disasters. The credit was enhanced and extended several times before ultimately being terminated retroactively by the Infrastructure Investment and Jobs Act in 2021. (See earlier coverage.) In short, the ERC is a refundable tax credit designed for certain employers whose businesses were affected by the COVID-19 pandemic. To be eligible an employer’s business must have been fully or partially suspended due to an applicable governmental order or had a significant decline in quarterly gross receipts between March 13, 2020, and Dec. 31, 2021, (September 30, 2021, for employers other than Startup Recovery Businesses) compared to the same calendar quarter in 2019. (See earlier coverage.) Such businesses can still claim the ERC on a late original or amended employment tax return for a period within those dates.
While many businesses with legitimate ERC claims have already made them, a cadre of consulting firms have come forward to, in the words of the IRS, “push ineligible people to file” claims. Many of these consultants charge upfront fees, or fees that are contingent on the amount of a refund. Furthermore, these consultants “may not inform taxpayers that wage deductions claimed on the business’ federal income tax return must be reduced by the amount of the credit.” Controversy over these consultants has also spilled over into litigation.
While the IRS has issued similar warnings about these issues, this week’s release makes several important observations:
- Anyone who is considering claiming an ERC needs to carefully review the eligibility guidelines themselves.
- If a tax professional raises questions about the accuracy of an ERC claim, businesses should pay attention.
- The IRS is actively auditing and conducting criminal investigations related to false ERC claims.
- If a business filed an income tax return deducting qualified wages before it filed an employment tax return claiming an ERC, the business should file an amended income tax return to correct any overstated wage deduction.
- Improperly claiming the ERC could result in a requirement to repay the credit along with penalties and interest.