The Clock Ticks for Employers With Inaccurate Employee Retention Credit Claims

The IRS has significantly increased its civil and criminal enforcement surrounding employee retention credit (“ERC”) claims. The ERC was a COVID-era tax relief measure that helped many employers retain their workforce during 2020 and 2021. Most businesses that applied for ERC benefits have either received payments, or have faced a significant wait for their ERC claims to be reviewed by the IRS. Some businesses are starting to receive rejection notices from the IRS. The IRS is urging all taxpayers to review their ERC claims and take appropriate next steps.

ERC Requirements

There were a number of requirements that employers (and their affiliates) had to meet to be eligible to claim the ERC on their quarterly payroll tax returns, either as originally-filed or on amended returns. These requirements include being affected by a government shut down order or suffering a significant reduction in gross receipts compared to earlier quarters. The eligibility requirements changed over the course of the ERC program. Even if a company was eligible for the ERC, the ERC was only available for certain “qualified” wages.

The IRS’s Concerns

Businesses may have filed for ERC benefits without fully analyzing their eligibility or wages and, unknowingly, filed ERC claims that were incorrect – in whole or in part. The IRS has announced a list of factors that may suggest an ERC claim is erroneous. Some of the more common factors include: 1) claiming multiple quarters where government shutdowns or gross receipts reductions did not impact all of the quarters or even an entire quarter, 2) using the same wages for Paycheck Protection Program loans and the ERC, 3) inclusion of wages paid to the majority owner of the business and his or her family, or 4) claiming based on supply chain disruption. Also, for large businesses with 100 or 500 full-time employees in 2020 or 2021, respectively, wages were only qualified under the ERC if the employees were not working.

Given the widespread availability of the ERC, many service providers were formed to prepare and submit ERC claims on behalf of businesses. Some of these providers were not reputable and submitted ERC claims for ineligible employers or for unqualified wages. These providers often charged fees based on a percentage of the ERC claimed, and told clients there was “nothing to lose.”

The IRS has estimated that about 80 to 90 percent of ERC claims submitted to date have an unacceptable, or higher, risk of being erroneous. The IRS is in the process of rejecting ERC claims the IRS has identified as “high risk.” ERC claims for quarters in 2021 are particularly vulnerable to being challenged as the government shut downs had mostly been lifted by 2021.

Call to Action

Employers with 2021 ERC claims that have received payment from the IRS have until November 22, 2024 to determine if they need to participate in the recently re-opened Voluntary Disclosure Program (“VDP”) for ERC claimants. Under the new ERC-VDP, taxpayers who received payment on their ERC claims can choose to voluntarily pay back 85 percent of their entire ERC refund.

The benefit of participating in the ERC-VDP is the retention of 15 percent of the ERC refund along with any interest the IRS paid on the ERC refund. Also, the IRS will waive penalties and interest on the portion of ERC repaid.

The consequences of not participating in the ERC-VDP are a full repayment of any ERC amounts the IRS demonstrates are erroneous, along with penalties and interest. The IRS generally has three years after the filing of a return to assess any adjustments to such return. However, the statute of limitations for the third quarter of 2021 was extended to five years.

There are three exclusions that will prohibit an employer from participating in the ERC-VDP. Businesses already under IRS civil or criminal audit relating to their 2021 ERC payroll tax returns. Taxpayers that have received a notice from the IRS demanding repayment of ERC refunds, and companies who have already withdrawn their ERC claims.

Employers with ERC claims that are still pending IRS review can withdraw their ERC claims under a separate program.

Conclusion

If you received, or are waiting for, ERC refunds and you are concerned that your business may not have qualified for the full ERC claimed, we can assist with reviewing your claims and your options. We also represent employers who receive an ERC audit notice, an ERC denial letter, or an ERC recapture or repayment notice.