Landscape of Employee Retention Credit Tax Issues

Is the IRS Still Processing ERC Claims, and What’s the Status of the Processing Moratorium It Announced on September 14, 2023?

First, was there ever a moratorium? The IRS announced it would not process ERC claims filed after September 14, 2023, but at that time it was still working through a sizeable backlog of claims that were filed before that date. Can the IRS stop processing a batch of claims that it never started processing? Putting that philosophical question aside, the IRS recently announced that it is still working through its pre-September 14thbacklog of ERC claims, and it has dramatically slowed processing times. It was processing about 40,000 claims per week and it is now down to 1,000 to 2,000 per week. That is because it is now analyzing the merits of ERC claims before it pays them.

Has the IRS Ramped up the Number of ERC Audits?

Yes. The IRS has significantly increased the number civil and criminal audits, and it has centralized the audit process. We are now seeing the IRS issue standardized information and document requests (IDRs) from a centralized office in Austin, Texas. Presumably the IRS will assign the files to specific agents once the taxpayers respond to the IDRs by sending responses to the fax number provided.

Is the IRS Still Issuing ERC Checks?

Yes, but very slowly. We are seeing and hearing from others that taxpayers are receiving checks, but only after the claims are reviewed and approved, or cleared on audit.

What’s the Difference Between the Withdrawal Option and Voluntary Disclosure Program?

These are separate and distinct programs with different rules, but in both cases taxpayers must apply for acceptance into the programs. The withdrawal option allows taxpayers to completely withdraw their ERC claims without fear of penalty assessments, but only if they have not received the ERC checks, or if they have received them, they have not cashed them. Once the checks are cashed, taxpayers may only apply for the voluntary disclosure program (VDP). The VDP allow taxpayers to keep 20% of the ERC claimed, tax free, as well as the interest received, but taxpayers must apply to the program by March 22, 2024, and agree to extend the statute of limitations. The VDP does not apply to (i) taxpayers under IRS audit, (ii) taxpayers under criminal investigation by the IRS, and (iii) taxpayers that received a letter or notice from the IRS disallowing their ERC claims.

Should I File a Protective Income Tax Refund Claim?

Taxpayers that claimed the ERC are obligated to amend their 2020 or 2021 tax returns, as applicable, to reduce their wage expense deductions by the amount of ERC claimed in each year. If a taxpayer amended its income tax returns and paid tax on the amount of the ERC, and either has not received the ERC funds or is under IRS audit, there is a chance it could get whipsawed if the IRS refuses to pay or denies the ERC claim and it cannot get a refund of the taxes paid. To prevent this, taxpayers can file a protective income tax refund claim. At this time, practitioners are recommending this to clients for the 2020 tax year because the statute of limitations on 2020 tax returns generally expires this year. The statute of limitations for 2021 income tax returns will not expire until next year.

Is There Legislation Pending That Would Alter the ERC?

Yes, the Chairs of the Senate Finance and House Ways and Means Committees in Congress released a bipartisan bill on January 16, 2024 (The Tax Relief for American Families and Workers Act of 2024) that would modify the ERC in significant ways. In addition to imposing penalties on ERC promoters, the bill would extend the statute of limitations on all ERC claims from 3 years to 6 years and prevent the filing of ERC claims after January 31, 2024, among other things. The changes to the ERC are the only revenue raisers in the proposal and while its passage is uncertain, there is still a chance Congress could act on it. If the bill is enacted into law, there is a good chance the January 31, 2024, filing deadline remains because it was announced publicly and changing it would reduce the amount of revenue raised from the proposal.

There is a lot going on with the ERC these days and practitioners are busy defending clients under IRS audit. I have successfully resolved many IRS audits and have others that are in various stages of audit or appeal. Clients are also inquiring with increasing frequency about their withdrawal options and whether the VDP is right for them. There are many factors that can impact these decisions, and they are not ones that should be taken lightly or without the benefit of experienced counsel.

This article was originally published by Daniel Mayo in Forbes on February 23, 2024.

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