By: James Pickett | 02/20/24
Background – Employee Retention Credits
The Employee Retention Credit is a refundable tax credit available to certain eligible businesses and tax-exempt organizations which had employees that were affected during the COVID-19 pandemic. The credit is available to eligible employers that paid qualified wages to some or all employees after March 12, 2020, and before January 1, 2022. Subject to limitations, the credit aims to provide financial relief to qualifying businesses that:
Due to growing concerns of fraudulent filings and deceptive practices in calculating ERC, the IRS has taken several steps to ensure the funds that have been or will be issued under ERC have been properly dispersed to qualifying taxpayers.
Many of these fraudulent ERC claims stem from taxpayers who engaged third-party firms that advertise their expertise in ERC claim preparation and made unscrupulous promises that almost guaranteed a substantial ERC refund regardless of the facts and circumstances involved. Moreover, many of these groups urged taxpayers to ignore advice from their tax professional CPA, Enrolled Agent or attorney. IRS has identified these ERC promoters. IRS can be expected to identify and audit taxpayers who engaged these “ERC mills” as IRS refers to them.
Since announcing a moratorium on processing new ERC claims in September 2023, the IRS has reviewed claims with more scrutiny and continues to require certain validating documentation be provided by applicants. It is crucial to ensure that all information provided in your claim is truthful and can be substantiated, as the IRS will be taking a closer look at the details of each claim. Businesses should be prepared for potential audits and inquiries into their ERC claims, even if they believe their claims are legitimate.
In the fall of 2023, IRS began offering an option for taxpayers to withdraw their unpaid Employee Retention Credit (ERC) claim. Taxpayers concerned about eligibility of ERC claims filed requesting a refund, can withdraw the claim and avoid getting a refund for which they are ineligible. Claims that are successfully withdrawn would be treated as if they were never filed and the IRS will not impose penalties or interest.
Finally, on December 1, 2023, IRS announced the Voluntary Disclosure Program, its latest step to protect the integrity of ERC and safeguard the funds allocated for economic relief during the pandemic. By implementing this program, the IRS intends to give these taxpayers the opportunity to disclose ERC claims made in error before an ERC audit occurs to minimize repercussions.
Recently, IRS issued an Information Release in which it identified seven signs that an ERC claim may be incorrect. This release highlighted the special warning signs that an ERC claim may be questionable to help small businesses that may need to resolve incorrect claims. IRS scrutiny of questionable ERC claims could include audits, demands for repayment of erroneous claims, and significant penalty assessments. These seven suspicious signs an ERC claim could be incorrect are:
Navigating the ERC program and potential IRS audits can be complex and challenging. Bennett Thrasher has expertise in handing IRS Employee Retention Credit tax issues with the IRS. For more information, please contact Tim Watt, Tax Partner, or James Pickett, Director of Tax Controversy.
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