On March 7, 2023, the IRS sounded a renewed cautionary note for employers contemplating Employee Retention Credit (ERC) claims. The ERC, introduced as part of the Coronavirus Aid, Relief, and Economic Security Act in 2020, evolved with enhancements and extensions before being retroactively terminated by the Infrastructure Investment and Jobs Act in 2021. This article dives into the intricacies of the ERC, the pitfalls to avoid, and why businesses must tread carefully in this terrain.
Understanding the Employee Retention Credit (ERC)
The Employee Retention Credit (ERC) was conceived as a lifeline for businesses grappling with the economic fallout of the COVID-19 pandemic. It was modelled on a credit initially adopted in response to natural disasters, reflecting the severity of the crisis. The ERC is a refundable tax credit aimed at specific employers whose operations were impacted by the pandemic. To qualify, businesses had to meet one of two critical criteria:
- Business Suspension. The employer’s business must have been fully or partially suspended due to a relevant governmental order.
- Revenue Decline. The business must have experienced a significant decline in quarterly gross receipts between March 13, 2020, and December 31, 2021 (or September 30, 2021, for employers other than Startup Recovery Businesses) compared to the same quarter in 2019.
While many eligible businesses have rightfully claimed the ERC, a growing concern has emerged around certain consulting firms that actively encourage ineligible parties to file claims. These firms often charge fees upfront or contingent on the refund amount and may neglect to inform taxpayers about the need to adjust wage deductions claimed on federal income tax returns. This issue has even spilled over into litigation.
IRS Warnings and Key Observations
The IRS has consistently warned about the potential pitfalls of ERC claims, and the latest advisory underscores several crucial points:
1. Personal Responsibility
Anyone considering an ERC claim should diligently review the eligibility guidelines themselves. Relying solely on consultants without understanding the intricacies can lead to trouble.
2. Tax Professional Insights
If a tax professional doubts an ERC claim’s accuracy, businesses should take these concerns seriously. It’s a red flag that deserves attention.
3. IRS Vigilance
The IRS audits and conducts criminal investigations of fraudulent or erroneous ERC claims. Compliance is paramount, and those who attempt to exploit the system could face serious consequences.
4. Amended Returns
If a business filed an income tax return deducting qualified wages before submitting an employment tax return claiming an ERC, it is advisable to file an amended income tax return to correct any overstated wage deductions.
5. Repayment and Penalties
Improperly claiming the ERC can result in the requirement to repay the credit, accompanied by penalties and interest. The financial consequences can be significant, emphasizing the need for precision.
Be Cautious For Aggressive Claims
In the complex realm of tax credits, the Employee Retention Credit (ERC) stands out as both a vital lifeline and a potential minefield for businesses. While the ERC was created to support struggling enterprises during the pandemic, its administration has encountered challenges, including unscrupulous consulting firms that exploit its complexities.
To navigate this terrain successfully, businesses must exercise due diligence, seek professional advice when needed, and ensure compliance with IRS guidelines. The consequences of missteps in claiming the ERC can be financially severe, making it imperative for businesses to approach this credit with a clear understanding of eligibility, regulations, and the potential hazards that may arise along the way. In the ever-evolving landscape of tax legislation, knowledge and compliance are your best allies in harnessing the full benefits of the ERC while avoiding costly pitfalls.
Solutions by Mike Miller, CPA 