More than 20,000 businesses are about to learn how serious the Internal Revenue Service is about stopping questionable Employee Retention Credit (ERC) claims. The tax agency has sent them a letter notifying them that they won't be getting the COVID-19 pandemic tax relief.
Many of the claims were filed by ERC mills that have aggressively promoted the tax relief, often to businesses that did not qualify. The amount of such questionable claims prompted the IRS in September to stop processing all new claims.
This first round of IRS letters to some of those who did file for the ERC is the latest move in the agency's crackdown on improper payments claimed by ineligible entities.
Two ERC problem areas: The ERC is refundable tax credit was created by Congress in 2020 and 2021 to help businesses that were struggling during the height of the COVID-19 pandemic.
The ERC allowed eligible small businesses to get thousands of dollars per employee that they kept on payroll.
The IRS action on the recently filed questionable ERC claims is straightforward. It is disallowing the tax break to entities that did not exist or did not have paid employees during the period of eligibility.
Specifically, notes the IRS in a statement about the letters, the mailings are going to —
- Entities established after Dec. 31, 2021. These operations are not entitled to the ERC since under WHAT SPECIFIC LAW, the business tax credit only applies to qualified wages for periods between March 13, 2020, and Dec. 31, 2021.
- Entities that did not pay any wages. The ERC was designed to help firms keep paying personnel during the coronavirus pandemic period where many were forced by state and local precautions to close. But some of the recent ERC claims were by those that did not pay any wages. No payments to staff means no ERC.
The IRS disallowance letter explains that if a recipient disagrees with the agency's disallowance, the taxpayer can respond with documentation that supports their eligibility or claim amount.
Taxpayers also have the option to file an administrative appeal.
Letters' multiple payoffs: The IRS says this latest ERC fraud prevention move will benefit both taxpayers ensnared by questionable credit promoters and Uncle Sam.
By disallowing ERC claims that the IRS deems ineligible before they are processed, the affected taxpayers won't face audits, repayment requirements, or added penalties and interest.
The disallowance process also means the IRS won't have to spend its resources on the generally costly audit process.
Finally, the letters also stymie unscrupulous ERC promoters looking to make a fast buck. The disallowances keep an incorrect refund from going to an ERC marketer, which is the process used by some who have convinced businesses to file for the tax credit.
More tax sticks and carrots: The letters are the IRS' stick component, albeit a relatively soft club, of its ERC compliance effort.
"With the aggressive marketing we saw with this credit, it's not surprising that we're seeing claims that clearly fall outside of the legal requirements," said IRS Commissioner Danny Werfel.
The IRS also is offering a carrot to businesses who incorrectly filed an ERC claim. They can use the agency's newly established special withdrawal program if they have a pending claim that they realize is inaccurate. IRS.gov's withdrawal program page has details on the process.
Later this month, the IRS will take additional ERC compliance moves.
"More letters will be going out in the near future, including both disallowance letters and letters seeking the return of funds erroneously claimed and received," said Werfel.
The IRS also will unveil a separate voluntary disclosure program. Here, those who received questionable payments can come forward avoid future IRS enforcement action.
Finally, the noted that it is continuing review of ERC claims, and may request more information from taxpayers to support their credit filings.
"As we continue our audit and criminal investigation work involving the Employee Retention Credits, we continue to urge people who submitted a claim to review the rules with a trusted tax professional," said Werfel. " If they filed an inaccurate claim, we urge them to consider withdrawing their pending claim or use the upcoming disclosure program to repay improper refunds to avoid future action."
Continue ERC caution: As the IRS does its job, it reminds taxpayers to be extremely cautious before applying for the ERC. Carefully evaluate any aggressive maneuvers used by marketers, who might turn out to be scammers.
If you're concerned about an ERC claim, even without getting an IRS letter, check out the credit requirements at IRS.gov's ERC frequently asked questions page. Also review the ERC Eligibility Checklist, which is available as an interactive tool or as a printable PDF guide.
And, of course, you should talk to a trusted tax professional about eligibility requirements, particularly if you're confused by the misleading marketing around the ERC.
You also might find these items of interest:
- Tips if the IRS audits your business' ERC claim
- W&M members want ERC backlog answers from IRS
- Business owners should look carefully at ERC promotions
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