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ERC Tax Credit Update

Due to the 3-year statute of limitations for 941 amendments, the ERC is now pertinent as the 2020 and 2021 quarterly amendments are nearing the final due dates. ERC claimants may file ERC-VDP to repay and avoid penalties and interest. Meanwhile, business owner ERC-applicants are anxiously waiting for IRS processing.

Covid-19 Stimulus

The “ERC” is the Employee Retention Credit, or ERTC (Employee Retention Tax Credit), initially announced by the IRS in 2020 to supplement businesses affected by Covid-19. At a high-level, the ERC credit would refund a portion of wages as an incentive for retaining employees during the U.S. economic shutdown in 2020 and 2021, however not double dipping with the PPP loan forgiveness. In this update, we do not provide the details regarding the qualifications, but note that the employer refund could potentially return as high as $26,000 per employee.

Claim Positions

Due to the 3-year statute of limitations for 941 amendments, the ERC is now pertinent as the 2020 and 2021 quarterly amendments are nearing the final due dates.  It is noted of the significant urgency and uncertainty during Covid-19, however the complexity and evolution of ERC qualifications would lead to difficulties for taxation and fraud-detection later down the road:

  • On March 25, 2020, the CARES Act was passed by Congress and by the CARES Act
  • On March 1, 2021, the IRS provided guidance with Notice 2021-20, detailing 71 questions and answers to illustrate the ERC rules. 
  • Additional calculation of qualified wages were outlined in IRS Notice 2021-23 and 2021-49. 
  • The ERC was further extended and modified by the Consolidated Appropriations Act (CAA) on December 27, 2020, the American Rescue Plan Act of 2021 (ARP). on March 11, 2021, and the Infrastructure Investment and Jobs Act (IIJA) on November 15, 2021.

The ERC would have significant impact to surviving business and bring to question the philosophical definition of “economic & tax fairness.” The details provided below are not an exhaustive list but provide notable complications leading to the ERC’s current state:

  1. Company owners needing funding may take an aggressive position regarding the qualifications regarding “suspended operations due to a government order related to Covid-19” or “a significant decline in gross receipts.”
  2. ERC promoters and schemes promising the maximum ERC refund may defraud business owners for a percentage of the refund or a large fee, while owners rely on third-party preparers to provide the technical and legal guidance. The ERC promoters may not be licensed professionals, while promising higher refunds that contradict the advised amounts from tax accounting professionals. The promoters fail to provide the guidance needed to make proper claims, amend tax returns for deducted wages, and provide advice for maintaining records. 
  3. The number of qualifying businesses increased significantly, as “a significant decline in gross receipts” was reduced from 50% to 20% for several quarters in 2021. Furthermore, the refund amount increased from $5,000 per year to $7,000 per quarter, leading to a much higher demand for ERC applications.
  4. The complexity of ERC rules did not raise the bar to be processed by qualified professionals, but may have encouraged dependence on preparers and/or urgency to acquire the funds and return it later. 
  5. Additionally, the complex rules may hinder the efforts to audit, detect fraud, and provide fairness of the program.

Current ERC State:

On September 14, 2023, the IRS issued IR-2023-169 to notify that there would be a pause on processing new claims until the end of 2023 calendar year. In the memo, the IRS cited compliance concerns, including intensifying audit and criminal investigations on promoters.  On Dec 21, 2023, the IRS announced the details of the ERC Voluntary Disclosure program (ERC-VDP). If ERC recipients determine that they are not qualified, they can submit Form 15434 by March 22, 2024, to repay the received ERC with the IRS waiving the penalties and interest. The taxpayer would sign an agreement that they were not qualified and provide the name and contact of the preparers.

ERC applications have been on hold from September 2023, while waiting for the IRS to restructure the procedures and advise. Normal IRS processing times for 941 amendments may have taken 4-6 weeks up to 90 days for the IRS’ standard processing goal. Currently business owners are anxiously waiting the IRS processing of refunds for the last 4 months (16 weeks), while the delays were caused by opportunistic applicants who may have received funds. We are hopeful the IRS does not shutdown the program, the scrutiny of new applications does not affect earnest applicants, and for swift processing times (the IRS’ goal has been extended to 180 days).

The information provided here is intended for informational purposes only and does not substitute for professional advice. Please refer to the terms of service for website usage.

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