As we begin 2023, we are still seeing many businesses that have not yet claimed the employee retention credit (“ERC”), and the potential benefit of this credit has attracted many inexperienced service providers making exaggerated promises in exchange for outsize contingency fees.
In fact, these service providers have become so prevalent that the IRS, in a relatively unprecedented move, released a warning to taxpayers to be wary of third parties advising them to claim the ERC when they do not qualify.
The influx of service providers has also caused significant confusion around some key issues, such as the deadline to file claims and the so-called ”recent changes” that make businesses eligible. Below are the facts about these claims, which we hope clears up the confusion.
The CARES Act, signed into law on March 27, 2020, created the ERC. It is a refundable payroll tax credit that applies to certain wages paid to employees starting March 13, 2020. The program has been amended various times and is available for most taxpayers through the third calendar quarter of 2021. Eligible taxpayers can receive up to $5,000 per employee during 2020 and up to $7,000 per employee, per quarter, for each of the first three calendar quarters of 2021. There are separate rules for recovery startup businesses (“RSUBs”) for the third and fourth calendar quarters of 2021, which we have written about here.
Act Quickly – Time is Running Out! – False
We are seeing targeted advertisements and hearing of cold calling and mailing campaigns where service providers urge taxpayers to act quickly, or they may lose out. Some even offer false and accelerated deadlines to get businesses to sign up quickly.
The truth is that there is no immediate deadline for claiming the ERC. The deadlines generally are as follows:
- For the ERC covering 2020, the deadline to file is April 15, 2024; and
- For the ERC covering 2021, the deadline to file is April 15, 2025.
The regular, quarterly employment tax form is Form 941; the ERC is claimed on IRS Form 941-X, which is the form used to amend a previously filed Form 941. Even though Form 941 is due quarterly, it is considered filed for purposes of the statute of limitations on April 15 of the tax year after the year to which it relates. For example, Form 941 for Q2 2020 would be due by July 31, 2020, but it would be considered filed for statute of limitation purposes on April 15, 2021, provided it was timely filed.
Form 941-X can be filed up until the deadline for the regular Form 941, which explains the filing deadlines listed above.
Congress did extend the time in which the IRS can audit and assess tax relating to the ERC for the third and fourth calendar quarters of 2021 from three to five years, but that did not change the above window period that taxpayers have to file claims for the ERC.
Act Quickly – ERC Money is Running Out! – False
Some service providers encourage taxpayers to file immediately by pushing the notion that the ERC is like the paycheck protection program (“PPP”) in that it includes a finite appropriation of funds that will run out.
In reality, the ERC program does not have a dollar limit like the PPP. The ERC program was scored by the Congressional Budget Office as part of the legislative process, but that process is intended only to provide an estimate of the expected cost of the program. It does not represent a pool of funds set aside for the program like there was with the PPP. There is no dollar limit on the amount of ERC funds that can be paid to taxpayers.
New Rules Changed Eligibility – You are NOW Eligible! – False
We have heard from many taxpayers that they are being approached with a sales pitch stating that the rules governing eligibility for the ERC have recently been changed, and they may now be eligible.
In fact, there have been no substantive changes to the ERC rules in 2022. The ERC was created by the CARES Act and then extended and modified by three additional acts:
- Extended/expanded by the Consolidated Appropriations Act, 2021 (December 27, 2020) to include the first two calendar quarters of 2021, among other amendments
- Extended by the American Rescue Plan Act of 2021 (March 11, 2021) to include the third and fourth calendar quarters of 2021, among other amendments
- Limited by the Infrastructure Investment and Jobs Act (2021) (November 15, 2021) to remove the fourth calendar quarter of 2021 for all taxpayers except RSUBs.
The IRS released various notices and other guidance interpreting the ERC program, the most significant of which are Notices 2021-20 (March 1, 2021), Notice 2021-23 (April 2, 2021), and Notice 2021-49 (August 4, 2021). The IRS also prepared a training guide for its employees in July 2022, but that document just summarized its existing rules in a format more conducive to training its employees.
You Don’t Pay Anything Unless You Get Paid! We Provide an Audit Guarantee! – Likely False
Many service providers offer grand promises, but we have seen instances where the engagement letters are not consistent with those promises. One such promise is the offer to provide audit “support,” which is not the same as promising to hire a qualified lawyer or accountant to represent you before the IRS if you are audited. Similarly, the offer to reimburse you for fees paid if you end up returning the credit to the IRS causes a lot of confusion because the engagement letters we have seen are not that clear and specific.
For example, what happens if you return the ERC to the IRS by way of settlement? The service provider can argue that the settlement was voluntary; that you settled because you didn’t have the stomach to fight, or that you were afraid the IRS would discover unrelated issues on your return. The service provider likely will insist that you litigate the ERC in court, at great expense and all the way to a court decision, before it “determines” that the fee reimbursement provision is met. How do we know this? We know this because if they were willing to reimburse you for a settlement with the IRS, they would state that clearly in the reimbursement provision of the engagement letter. It would be easy to include language to that effect and to address whether they will pay for your representation along the way. It seems clear that the absence of such clarity is intended for their benefit, not yours.
We are also seeing some service providers add language in their engagement letters to state that they are not providing any tax or accounting advice, despite the fact that the purpose of the engagement is to determine eligibility for and to calculate the amount of a federal tax credit. This is most likely a naked attempt to limit liability in the event of litigation and to provide an avenue for them to charge a contingency fee for this work.
We recommend you have the engagement letter reviewed by legal counsel before you sign it.
How Can Withum Help?
Our dedicated team of ERC experts can help with all of the following:
- Determining eligibility for the ERC;
- Calculating the amount of the ERC and ensuring you receive the maximum amount to which you are entitled, including working around the PPP and other federal tax credit limitations;
- Providing documentation that you can give to the IRS if you are audited; and
- Representing you before the IRS if you are audited, regardless of who prepared your credit.
Our national tax practice at Withum represents clients in all 50 states. Most ERC audits are conducted remotely and your advisor is not required to be in the same state as you. The most important thing to do if you are audited by the IRS is to hire qualified and competent ERC experts to represent you because what you say first matters, and it can be very challenging to recover from an audit situation that is not handled correctly from the outset.