Key highlights
- The IRS has issued a renewed warning to taxpayers not to fall for schemes related to the Employee Retention Credit (ERC).
- Many employers may still qualify for the credit and have time to file their Form 941X — assuming they meet eligibility test(s) and have wages related to the credit.
False claims can generate Employee Retention Credit compliance risks
The IRS issued a renewed warning to taxpayers not to fall for schemes related to the Employee Retention Credit (ERC). In this warning, the IRS reinforced its statement from October 2022 urging taxpayers to fully consider their eligibility for the credit prior to amending payroll tax returns.
The IRS is reacting to the deluge of misleading advertising dubious ERC companies are broadcasting to create a sense of urgency surrounding the deadline to apply for ERC. The warning reminded taxpayers that incorrect claims may be subject to significant interest and penalties. The IRS also asked taxpayers and advisors to report inappropriate solicitations to the IRS Lead Development Center in the Office of Promoter Investigations.
The IRS can audit an employee retention credit request within five years after it has been filed, and they may ask for proof of eligibility, backup of gross receipts, and proof of impact due to government orders in order to support the greater than 10% nominal impact safe harbor.
Given the IRS warnings, the takeaway is clear. First, employers who have not yet claimed the ERC but who are trying to determine whether they qualify should seek a tax opinion from a qualified tax professionals. Second, employers who have already claimed the ERC, particularly those employers who claimed the ERC through third-party promoters, should reach out to a qualified tax professional to have an independent determination made as to whether the employer truly qualifies and, if so, whether the employer complied with all parts of the law applicable to the ERC.
Still time to benefit from employment credits
Despite unscrupulous ERC providers, many employers may still qualify for the ERC and have time to file their Form 941X — assuming they meet the eligibility test and have wages related to the credit.
To be an eligible employer, the organization must have experienced a significant decline in gross receipts or been more than nominally impacted by a government order fully or partially suspending business operations.
Deadline to Apply
The Employee Retention Credit deadline has been a moving target since it was first introduced in 2020. Fortunately, we now have clarification from the IRS.
The ERC filing window closes only once for each year of the ERC:
- 2020 – for all quarters in 2020, the deadline to apply is April 15, 2024
- 2021 – for quarters 1, 2 and 3 in 2021, the deadline to apply is April 15, 2025
While there is still ample time, applying for ERC credits can be a time-consuming process. Depending on your route to qualification and your timely submission of key documents, it can occasionally take months to build an ERC claim. Once your tax amendment is submitted, the IRS generally takes up to six months to process it, and up to nine months to deliver your refund check.
What is the ERC?
Originally available from March 13, 2020, through December 31, 2020 and then extended through September 30, 2021, the ERC is a refundable payroll tax credit created as part of the CARES Act. The purpose of the ERC was to encourage employers to keep their employees on payroll during the pandemic.
For 2020, qualifying employers could claim up to 50% of qualified wages or $5,000 annually, whichever is smaller, including eligible health insurance expenses. The Consolidated Appropriations Act (CAA) expanded the ERC. Employers that qualified in 2021 can claim a credit of 70% in qualified wages, up to $7,000 per quarter for the first 3 quarters.
The CARES Act does prohibit self-employed individuals from claiming the ERC for their own wages. You also can’t claim wages for specific individuals who are related to you, but you can claim the credit for wages paid to employees.
Who is eligible for the ERC?
Whether or not you qualify for the ERC depends on the time period you’re applying for. To be eligible for 2020, you need to have run a business or tax-exempt organization that experienced a significant decline in sales—50% or more of comparable gross receipts compared to the same quarter in 2019.
If you’re trying to qualify for 2021, you must show that you experienced a decline in gross receipts of 20% or more compared to the same quarter in 2019. If you were not in business in 2019, you can compare your gross receipts to 2020.
Alternatively, a qualifying employer may be one whose trade or business was fully or partially suspended during a calendar quarter due to governmental orders related to COVID-19. If an employer’s business operations continued, but the operations were subject to modification due to a governmental order, the modification can be considered a partial suspension of business operations if the required modification had more than a nominal effect (10% or greater) on the business operations under all the facts and circumstances. In addition to being tied to specific government shutdown order(s), the nominal effect must be documented and supported.
How to claim the tax credit
Some businesses, especially those that received Paycheck Protection Program loans, Restaurant Revitalization or Shuttered Venue Operator Grants, mistakenly believed they did not qualify for the ERC. If you now realize that you are eligible for the ERC, you can retroactively apply by filling out the Adjusted Employer’s Quarterly Federal Tax Return (941-X).
If you are eligible to receive credits, you will also need to amend your federal business returns to reflect the ERC credit for those years in which qualified wages were expensed (2020 and/or 2021). The wage expense will need to decrease in the amount of the credit received, which will result in an increase of income. This may also affect the shareholders/partners of that business, who could then need to amend their personal returns for those years.
Questions?
Please contact your Warady & Davis LLP advisor(s) with your questions at 847-267-9600; info@waradydavis.com.
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