By Debbie Tam
We have the first update to the IRS’ recently released new FAQs regarding the Employee Retention Credit (ERC). See IRS Releases New FAQs on the Employee Retention Credit (07/31/2023).
The FAQs were released as part of the IRS’ continuing efforts to warn taxpayers of ERC fraudsters. The latest update contains information regarding qualifying government orders, decline in gross receipts, recovery startup businesses, and when taxpayers can expect an ERC refund. IRS Commissioner Danny Werfel recently said that the IRS believes the percentage of legitimate ERC claims continues to decline.
The following additional FAQs were added on July 28, 2023.
- Qualifying government orders. The FAQs explain that one of the qualifications for the ERC is that a business must have been subject to a government full or partial shutdown order as a result of the pandemic and the business did not operate as a result of the order. This can be a federal, state, or local order. The FAQs provide a number of examples. It notes that a recommendation from the government is not sufficient to satisfy the requirement. If a business was able to sustain operations by using remote workers during a shutdown order, the business would not qualify for the ERC. The FAQs also note that supply chain issues alone will not qualify a business for the ERC and provide a reference to a recent legal memo. See IRS Releases New FAQs on the Employee Retention Credit (07/31/2023).
- Decline in gross receipts. The other ERC qualifying reason would be a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021. The FAQs provide a number of examples.
- Recovery startup business. The FAQs provide the terms by which a recovery startup business may qualify for the ERC for the third and fourth quarters of 2021. These businesses cannot qualify using the government order or decline in gross receipts test.
- Timing. The FAQs note that the IRS is still processing ERC claims. The IRS Operations: Status of Mission-Critical Functions webpage provides updates on the backlog of Forms 941 and 941-X processing. As of July 27, 2023, the IRS had 735,000 unprocessed Forms 941. As of July 26, 2023, the IRS had 506,000 unprocessed Forms 941-X.
Observation: IRS Commissioner Danny Werfel spoke at a special roundtable session of tax professionals in Atlanta, Georgia, and recently stated that the IRS had “successfully clear[ed] the backlog of valid Employee Retention Credits (ERC) claims (IR 2023-135, 7/26/2023). However, it is unclear how this backlog relates to the backlog that currently exists of unprocessed Forms 941 and 941-X.
The FAQs now also contains a new warning that taxpayer should not accept a generic document about a government order from a third party. If a third party claims ERC eligibility, taxpayers should request a copy of the actual government order. The order should be reviewed to determine if the order applied to the taxpayer’s business.
Legislation to combat ERC fraud on the horizon.
Werfel is exploring “legislative solutions” to combat ERC fraud and error. A possible suggestion would to put an earlier end date for claiming the credit. Generally, for 2020 tax periods, the deadline is April 15, 2024. For 2021 tax periods, the deadline is April 15, 2025.
This article originally appeared in Checkpoint’s Payroll Update.
For more information about the ERC, see Checkpoint’s Federal Tax Coordinator ¶H-4687.3.
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