By Debbie Tam
On November 2, the IRS presented a webinar, Employee Retention Credit: Latest information on the Moratorium and Options for Withdrawing or Correcting Previously Filed Claims. Roy Chaney, Senior Stakeholder Liaison for the IRS, discussed the current moratorium on Employee Retention Credit (ERC, sometimes referred to as the Employee Retention Tax Credit or ERTC) claims, the ERC claim withdrawal process, and strategies aggressive promoters use to lure businesses to make false ERC claims and how the IRS is combating abuse. John J. McInelly, the Executive overseeing the ERC program for the IRS, was on hand to address questions from participants.
New ERC claim processing moratorium.
On September 14, 2023, the IRS announced an immediate moratorium until at least the end of the year in response to the flood of ERC claims received due to aggressive promoters and marketers pressuring businesses to submit ineligible claims. Chaney noted that the IRS has over 600,000 claims in its current open inventory, nearly all of which were received within 90 days before the moratorium of this expired credit.
IRS efforts to combat abuse.
The IRS continues to work with the Department of Justice to address ERC fraud by pursuing promoters. Specifically, the IRS Criminal Investigation (CI) Division is actively working to identify fraud and promoters of fraudulent claims for potential referral for prosecution to the Justice Department. As of July 31, 2023, the CI Division initiated 252 investigations involving over $2.8 billion of potentially fraudulent employee retention credit claims.
ERC claims continue to be processed.
The IRS noted that while new claims will not be processed until next year, claims received prior to September 14 continue to be reviewed. However, Chaney cautioned that due to the complexity of these filings, normal processing times will be stretched to 180 days or longer. The IRS is intensifying audit work with thousands of ERC claims being referred for audit. Chaney stressed that due to the large volume of claims received and the need for compliance checks to protect against fraud, the IRS is unable to expedite any individual claims. The IRS urges that businesses review the ERC guidelines if they are considering filing an ERC during the moratorium period. The IRS has released the Employee Retention Credit Eligibility Checklist to assist taxpayers. Taxpayer should take precautions and independently verify their eligibility to receive the credit. The IRS advises businesses to speak to a trusted tax professional, not a tax promoter, to determine ERC eligibility.
Withdrawal process.
Taxpayers who filed an ineligible ERC claim may withdraw their claim through a withdrawal process (see IRS Unveils Employee Retention Credit Withdrawal Process, 10/20/2023). Penalties and interest will not be imposed if the ERC claim is withdrawn before it is processed. The withdrawal process is available only to:
- Employers that claimed the ERC on an adjusted employment return (Forms 941-X, 943-X, 944-X, CT-1X).
- Employers that filed the adjusted return only to claim the ERC, and made no other adjustments.
- Employers that want to withdraw the entire amount of their ERC claim. Employers may not use the withdrawal process for partial amounts and must submit an amended tax return.
- Employers whose claim has not yet been paid or employers who have not yet cashed or deposited the refund check.
The method of the withdrawal process depends on whether the employer is under audit or whether a refund has been received or received but not yet cashed. Also, employers who used a payroll service provider, certified professional employer organization, professional employer organization, or Code Sec. 3504 agent, should contact their third-party filer/payer for information.
Employers ineligible for the withdrawal process may reduce or eliminate their ERC claim by filing an amended return.
Details on the withdrawal process are available on the IRS website.
Effective date for a withdrawal request.
The IRS will notify a taxpayer whether a withdrawal request is approved or rejected. Chaney emphasized that the effective date of a withdrawal request is based on the acceptance letter date. Further, if the withdrawal request is approved, the taxpayer may need to file an amended income tax return.
Process for repayment of ineligible ERC claims.
Chaney noted that the IRS will be issuing guidance soon that will allow taxpayers to make repayments for an improperly received ERC claim that has already been cashed or deposited. McInelly warned that taxpayers may not use the withdrawal process and send a repayment for the ERC claim.
No sunset date yet for the withdrawal process.
McInelly noted that initially the IRS considered a sunset date for the withdrawal process. While the process will not be available indefinitely, the IRS has not yet set an expiration date. He said it is possible that the process may sunset at the end of the moratorium.
Common issues found with ineligible ERC claims.
Chaney noted that many taxpayers will improperly cite supply chain issues as the basis of their ERC claim. He noted that this type of issue rarely meets the eligibility criteria. McInelly noted other common features of an ineligible ERC claim include:
- The taxpayer was not in business in 2020 and/or 2021.
- The decline in gross receipts requirement is not met and in fact, there was an increase in gross receipts in the relevant time period.
- Misunderstanding what qualifies as a government order for a partial shutdown.
- Finding that no W-2s were filed in the relevant year.
Common errors with withdrawal processes.
McInelly noted that so far, the IRS has found the most common problem with submitted withdrawals is that the copy of the amended return is not signed in the right-hand margin as required.
Withdrawing the ERC for multiple quarters.
McInelly explained if a taxpayer claimed the ERC for more than one quarter and wishes to withdraw the claim for more than one quarter, the taxpayer must submit a copy of the amended employment tax return for each quarter that is being withdrawn. For example, if a taxpayer claimed the ERC for three quarters but is only eligible for one quarter, the taxpayer must submit two withdrawal requests for each quarter they were not eligible.
Duplicate ERC claims.
If a taxpayer submitted a duplicate ERC claim for which they have already received a refund, McInelly explained that the taxpayer can withdraw the duplicate claim by filing the related adjusted return through the withdrawal process.
Statute of limitations.
Generally, for 2020 tax periods, the deadline for claiming the ERC is April 15, 2024. For 2021 tax periods, the deadline is April 15, 2025. McInelly stressed that the deadlines stand and that the IRS does not see that it has the authority to extend the time to claim the ERC.
This article originally appeared in Payroll Update.
For further information on the Employee Retention Credit, see Checkpoint’s Federal Tax Coordinator ¶H-4687.5.
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