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by Dean Zerbe, Former Senior Counsel to the U.S. Senate Finance Committee; alliantgroup National Managing Director
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Congress giveth and Congress taketh. Congress (and especially the Senate) will soon consider the House-passed Tax Relief for American Families and Workers Act. For business owners – the giveth part of this legislation is primarily bringing back R&D (Section 174) expensing – which means businesses should be looking hard at the R&D tax credit. The taketh part of the bill is the proposed early cut-off of filing for the Employee Retention Credit (ERC). ERC claims must have been filed by January 31, 2024 (if the bill as currently drafted becomes law). Currently, the outlook is the legislation has a good chance of becoming law (in part due to the strong bipartisan vote in the House).
Setting aside possible legislation, administering the ERC continues to be a significant challenge for the IRS. As readers are aware, the IRS has seen a higher number of applicants for the ERC then was originally anticipated when Congress passed this Covid-relief tax credit. The IRS is especially concerned that a number of the ERC applicants are being driven by “pop-up shop” promoters who are encouraging taxpayers to apply for the ERC even if the taxpayer doesn’t qualify (or doesn’t qualify for the full amount the promoter claims they are eligible).
The IRS has four groups it is trying to deal with: 1) small and medium businesses and tax-exempt entities (“taxpayers”) that have applied for, and qualify for the ERC; 2) taxpayers that have applied for the ERC — but only qualify for a portion of what the taxpayer claimed for the ERC; 3) taxpayers that have in good-faith applied for the ERC (often due to a promoter) and do not qualify for the ERC – who have received the ERC; and, 4) taxpayers that have in good-faith applied for the ERC and do not qualify for the ERC that have NOT received the ERC yet (still being processed).
Taxpayers Waiting Who (Think They) Qualify For The ERC
Taxpayers who have applied for the ERC and believe they qualify for the ERC (but have not received your dollars yet) — then they are in the que to be processed by the IRS. In response to the flood of ERC filings, the IRS last year announced a moratorium on processing ERC claims filed after September 1, 2023. Not a surprise, that moratorium has continued to be pushed back – with the IRS now saying that processing is not going to start up again until the IRS has in place new risk analysis procedures and expanded transcription processes (as well as training staff).
I should add that processing of pre-September 1, 2023 ERC filings are hardly going at a sprint – “moving like pond water” would I think best capture the speed.
However, I would like to bring an extreme note of caution to readers – if you have filed for the ERC and waiting for that check from the IRS – now is the time to sharpen your pencil (and talk to a tax professional) and make certain that you really are qualified for the ERC. As I wrote earlier for Forbes – there are a number of red flags to look for to make sure your ERC filing is squared away (and see below – the IRS has just come out with more red flags . . . ). You want to be ahead of any problems with the IRS and make sure that your ERC filing is correct and supported with the required documentation (ex. the specific Covid-related government order that impacted your business in a more than nominal manner).
It may be that your business does qualify for ERC – but only partially qualifies. We see that commonly – for example in cases where a taxpayer has initially claimed 4 or more quarters (rare for a taxpayer to qualify for ERC for that many quarters). Time to think about amending your ERC filing and making sure it is correct and documented. And certainly, if it turns out you don’t qualify for the ERC – important to then think about the path forward (discussed below) – either the special withdrawal process if you haven’t received a check from the IRS yet for ERC, or the ERC Voluntary Disclosure Program (ERC-VDP) if you have already received a check from the IRS for ERC – which expires March 22, 2024.
IRS: 7 Suspicious Signs An ERC Claim Could Be Incorrect
The IRS recently put out a news release highlighting red flags that an ERC claim may have problems. Along with the “too many quarters being claimed” discussed above, the IRS also encourages taxpayers to look at:
Government orders that don’t qualify – the government orders have to be in effect and the employer’s operations must have been fully or partially suspended; the government order must be due to the Covid-19 pandemic; and it has to be an order – not guidance, a recommendation or a statement. Watch out particularly for claims as to OSHA or CDC pronouncements being an order.
Too many employees and wrong calculations. The IRS notes that the law changed for ERC and there are dollar limits and varying credit amounts – and employers need to meet certain rules for wages to be considered qualified wages. This isn’t a walk in the park.
Supply chain. I’ve written on this previously for Forbes. Qualifying due to supply chain issues is very much a hop-on-one-foot; a-bow-in-your-hair; and wear a pink dress to qualify provision. It isn’t easy.
Business claiming ERC for too much of a tax period. It’s possible, but uncommon, for an employer to qualify for ERC for the entire calendar quarter.
Business didn’t pay wages or didn’t exist during the eligibility period.
Promoter says there’s nothing to lose. Watch out for the pop-up rpomters telling you to claim ERC because you “have nothing to lose.”
Taxpayers That Do Not Qualify For The ERC
For taxpayers who have filed for the ERC – but now think they do not qualify at all (as opposed to partially qualify) – the IRS has provided two programs. The first – the Special Withdrawal Option is for those taxpayers who have not received and cashed their ERC $. The second – ERC VDP (Deadline March 22nd, 2024) is for those taxpayers who have received and cashed their ERC $.
Special Withdrawal Option (Have NOT Received And Cashed ERC $)
The IRS announced on October 19, 2023 the “special withdrawal process” for ERC is available for taxpayers who meet ALL of the following:
- They made the claim on an adjusted employment return (Forms 1041-X, 943-X, 944X, CT-1X)
- They filed the adjusted return only to claim the ERC, and they made no other adjustments;
- They want to withdraw the entire amount of their ERC claim;
- The ERC has not paid their claim, or the IRS has paid the claim, but they haven’t cashed or deposited the refund claim.
As of today, there is no deadline for the special withdrawal option. The understanding is that withdrawal avoids an erroneous refund penalty and potentially having to repay penalty and interest.
Voluntary Disclosure Program (ERC VDP)(Have Received And Cashed ERC $)
The ERC VDP was put forward by the IRS in a December, 2023 announcement that provides for a March 22nd 2024 deadline to apply. Clearly as you can see below, the IRS is aggressively seeking ways to deal with all the potential problem children and encouraging taxpayers to come forward and get right with the IRS.
As the IRS spelled out in a recent webinar — the ERC VDP is for taxpayers who claimed and received the ERC – but were in fact ineligible – may apply for the ERC VDP. The program requires the taxpayer to: 1) pay back the ERC received (minus 20%); respond timely to any IRS requests for more information; 3) provide information about anyone who advised or assisted you with your ERC claim; and 4) sign a closing agreement.
The taxpayer therefore only has to repay only 80% of the ERC already received (and the remaining 20% won’t be taxable as income). Taxpayers won’t have to repay interest they received on their ERC refund and don’t need to amend income tax returns to reduce wage expenses. The IRS will also not charge penalties or interest on ERC repaid in full and the IRS won’t examine/audit ERC on your employment tax return for the tax periods resolved by the ERC VDP. Wow.
To be clear, you aren’t eligible to apply for the ERC-VDP if your ERC claim has not yet been processed and paid, or if it was paid, the refund check has not been cashed or deposited; you think you are ineligible for only a portion of the ERC for the period you’re apply for; you are under employment tax examination by the IRS; you’ve been notified that you are, or will be, under criminal investigation by the IRS. All-in-all quite an open door by the IRS — but a door that closes March 22nd 2024.
Conclusion
Now is the time to sharpen your pencil – to confirm you are eligible for the ERC; consider amending if your initial ERC filing doesn’t have its feet on the ground but you still (even if partially) qualify; and if you find you don’t qualify – consider whether you should withdraw or participate in the VDP.
Check out my website.
We have been working with scores of businesses and nonprofits that have taken ERC with “pop up” shop providers and now are waking up recognizing that all this may be too good to be true.
Featured Leadership
Dean Zerbe is alliantgroup’s National Managing Director based in the firm’s Washington D.C. office. Prior to joining alliantgroup, Mr. Zerbe was Senior Counsel and Tax Counsel to the U.S. Senate Committee on Finance. He worked closely with then-Chairman and current Ranking Member of the Finance Committee, Senator Charles Grassley (R-IA), on tax legislation. During his tenure on the Finance Committee, Mr. Zerbe was intimately involved with nearly every major piece of tax legislation that was signed into law – including the 2001 and 2003 tax reconciliation bills, the JOBS bill in 2004 (corporate tax reform), and the Pension Protection Act. Mr. Zerbe is a frequent speaker and author on the outlook for short-term and long-term changes in tax policy, as well as ways accounting firms can help their clients lower their tax bill.
