Contributed by: Windham Brannon.
On Sept. 14, 2023, the Internal Revenue Service (IRS) announced a moratorium on processing new Employee Retention Credit (ERC) claims effective Sept. 14, 2023, to Dec. 31, 2023. The moratorium comes with continued mounting concern regarding questionable ERC claims and potential scammers, as well as concerns from tax professionals. Now that the moratorium is here, what should the next move be for taxpayers who already filed their ERC claim?
Getting a Second Look for Your ERC Claim
With the heightened attention now given to ERC, IRS Commissioner Danny Werfel has recommended that taxpayers with questions or concerns about their ERC claim should immediately contact a qualified tax professional to evaluate and assess their claim validity and eligibility.
If you filed your ERC claim early before any IRS guidance was released, or you have second thoughts about the provider you used to prepare and file your claim, Windham Brannon’s Tax Controversy Practice can provide a second look of review to help you avoid being subject to additional financial impact if you do not proactively correct any errors.
During a second look review, our professionals review and verify the following information:
- Review your ERC eligibility of either your gross receipts calculation or your partial shutdown due to government mandate criteria.
- Ensure that you were appropriately deemed a small or large business employee.
- Ensure that you correctly consider your Paycheck Protection Program (PPP) loan.
- Ensure that you excluded owners and relatives from the employee calculations.
- Recalculate and file your amended return if necessary.
Key Takeaways from the New Moratorium
The following are key takeaways from the moratorium for impacted taxpayers who either already filed for their ERC claim or had planned to do so this year.
- The IRS currently has at least 600,000 ERC claims not yet processed.
- The IRS will continue to work on previously filed ERC claims received prior to Sept. 14, 2023. Refunds for previously filed ERC claims will be issued during the moratorium but at an even slower pace than before due to additional IRS review.
- Detailed compliance reviews will be implemented for ERC claims not yet issued.
- The IRS may request additional documentation from filing taxpayers before processing ERC claims.
- There may be additional new procedures added for any future ERC claims.
- The IRS issued a new Q&A guide as of Sept. 14, 2023, for updated guidance on ERC eligibility.
- A settlement program will be rolled out for any businesses that incorrectly received the ERC and must repay the amount, including any portion or commission paid to a third-party ERC promoter (typically 20 to 25 per cent). The program will allow businesses to avoid penalties and future compliance actions.
- There will be a withdrawal option available for those who have already filed but haven’t received their ERC refund. Any fraudulent claims will not be exempt from potential criminal investigation and prosecution.
- The IRS has noted repeated instances of businesses that improperly cite supply chain issues as a basis for an ERC claim when a business with those issues will very rarely meet the eligibility criteria. Under any scenario, if a business claimed the ERC earlier and the claim has not been processed or paid by the IRS, they can withdraw the claim if they now believe it was submitted improperly – even if their case is already under audit or awaiting audit. More details will be forthcoming.
A Brief History and Context
The ERC was first introduced in March 2020 via the Coronavirus Aid, Relief, and Economic Security (CARES) Act to help businesses retain and pay their employees during the COVID-19 pandemic, with employers originally eligible to receive the credit through 2021. Employers claiming the ERC were originally not allowed to also apply for Paycheck Protection Program (PPP) loans, another incentive for businesses introduced around the same time. However, the Consolidated Appropriations Act (CAA) later made changes to ERC eligibility in December 2020, including the allowance for PPP loan participants to also claim the ERC as long as they used wages not used for PPP loan forgiveness.
The CAA also increased the 2021 maximum credit amount ($7,000 per quarter), reduced the 2021 reduction in gross receipts percentage in order to qualify (20 per cent) and changed the threshold for qualifying as a 2021 large employer (500 average full-time employees).
In March 2021, the American Rescue Plan Act (ARPA) extended the ERC through Dec. 31, 2021, and also made eligibility available for certain Recovery Startup businesses and those defined as severely financially distressed employers (SFDEs). Later in 2021, the Infrastructure Act terminated ERC for wages paid in the fourth quarter of 2021 for employers that were not Recovery Startup businesses.
Concerns for ERC Filers and Tax Practitioners
The changes and amendments to ERC filing have caused confusion about how to properly claim the credit. Specifically, employers who either (1) filed very early for the ERC before relevant guidance became available or (2) filed due to government suspension mandates related to the COVID-19 pandemic could be nervous due to the recent warnings from the IRS about the validity of their ERC claim. Unfortunately, many employers do not know where to receive credible information to file their ERC claim correctly. On top of that, many small business tax practitioners who are inundated with tax preparation may also not be up to speed on ERC eligibility guidelines – therefore, such filers may have chosen to opt for third-party assistance, making them susceptible to ERC scammers.
For tax practitioners, the concerns are equally arduous. Some practitioners won’t discover that their clients filed for ERC until they receive IRS Form 1099-INT for 2023, which reports the interest earned from the ERC refund. Many practitioners also fear they will lose the client if they disclose that their ERC claim is incorrect or lacks a reasonable basis.
Other ERC Risk Factors
The following list includes specific risk factors or errors for employers who already claimed the ERC but could subsequently be subject to an IRS audit:
- You filed for ERC for Q4 2021, but your business was in operation prior to Feb. 15, 2020. (Fourth quarter 2021 ERC is only eligible for Recovery Startup businesses that started after Feb. 15, 2020).
- You filed Form 941-X, but the original Form 941 wages are not consistent with the ERC amounts claimed.
- You filed Form 941-X, and no salaries/wages deduction on your originally filed income tax return (Form 1099-MISC or NEC contractors only).
- You filed for ERC for Q4 2021, and your income tax return three-year average gross receipts were reported in excess of $1 million. (Note that a business would not be eligible as a Recovery Startup Business due to gross receipts exceeding $1 million).
- You claimed ERC based on general supply chain issues.
- The ERC amount for any employee was greater than $5,000 in 2020 or $21,000 in 2021.
In 2019, you had more than 100 average employees and claimed ERC in 2020 for all employees or had more than 500 average employees and claimed ERC in 2021 for all employees. (Note that large employers can only claim ERC for the wages paid to employers who did not work).
You filed for ERC claiming the same wages used for Paycheck Protection Program (PPP) loan forgiveness.
WINDHAM BRANNON CAN HELP
For taxpayers who filed early, have second thoughts about the provider they used or have concerns about a possible audit of their ERC claim, a second look review can proactively help you get ahead of adverse consequences in the future as well as provide peace of mind. Windham Brannon’s professionals know the ERC and can help answer questions about ERC claims that you would expect from a professional services provider.
Our Practice Leader, Tomika Bullet, has 15 years of experience with the IRS and has prepared numerous ERC claims since January 2021. For questions or more information about ERC and the current moratorium, including a second look at a previously filed ERC claim, contact Tomika Bullet. Learn more about the ERC Risk Assessment.
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