Employee Retention Credit (ERC) claims and refunds have been a hot topic lately, especially after the Internal Revenue Service (IRS) announced a moratorium on processing certain claims last year. Recently, the IRS announced plans to send denial letters in certain situations.
Experts from GHJ’s Corporate Tax Practice have insights into the latest developments in the ERC program.
MORATORIUM ON ERC CLAIMS PROCESSING
Last year, the IRS announced a moratorium on processing ERC claims submitted after Sept. 14, 2023. This moratorium remains in effect, with no date provided for when the IRS might resume processing these claims.
The IRS plans to consult with Congress on potential legislative action before making any decisions on the future of the program. Claims submitted before Sept. 14, 2023 are still being reviewed but may be subject to greater scrutiny as further explained below.
WARNING SIGNS OF INCORRECT ERC CLAIMS
The IRS originally released a list of seven warning signs that may suggest an incorrect ERC claim was filed:
- Too many quarters being claimed
- Government orders that do not qualify
- Too many employees and incorrect calculations
- Supply chain disruptions cited as the basis
- Claims for too many days/weeks within a tax period
- Wages not paid or nonexistent during the eligibility period
- Promoters claiming there is nothing to lose by filing
According to a recent release, IRS compliance teams have identified five additional warning signs that have appeared on ERC claims:
- Full operation during the pandemic with no decline in gross receipts
- Insufficient information on how a government order fully or partially suspended business operations
- Family members' wages being claimed as qualified wages
- Wages already used for Paycheck Protection Program (PPP) loan forgiveness
- Wages claimed by large employers for employees who provided services
DENIAL LETTERS FOR HIGH-RISK CLAIMS
On June 20, 2024, the IRS announced that it would begin distributing denial letters to the 10-20 percent of ERC claims that were deemed high-risk and showed clear signs of being erroneous. The IRS analysis estimates between 60 and 70 percent of the claims show an unacceptable level of risk. For this category of claim with risk indicators, the IRS will be conducting additional analysis.
In recent weeks, the IRS has sent out 28,000 disallowance claims worth up to $5 billion. Thousands of audits are underway and 460 criminal cases have been initiated.
The criteria the IRS used to determine which claims to deny appear to be unrelated to the taxpayer's industry, location, revenue or the size of the ERC claim.
There could be substantial interest and penalties associated with erroneous ERC refunds. The IRS recently issued proposed regulations imposing additional underpayment penalties and interest on erroneous refunds for a denied ERC credit.
WHAT TO DO IF YOU RECEIVE A DENIAL LETTER OR FILED AN ERRONEOUS CLAIM
File an Appeal: If you receive a denial letter, you have 30 days from the date of the letter to file an appeal.
Information that may support an appeal may include:
- The IRS has insufficient information to determine that a taxpayer does not qualify.
- The IRS has incomplete information to make inferences on gross receipts based on income tax returns.
- The IRS did not consider aggregation or any other potential entities in establishing a taxpayer's position as an eligible employer.
Correct Erroneous Claims: If your original ERC claim contains errors, it is crucial to act promptly. You must correct the mistake by filing Form 941-X. This form allows you to adjust the amounts reported on your Form 941 or originally filed Form 941-X, return any erroneous refund and correct discrepancies in an ERC claim.
Qualifying taxpayers may still file Form 941-X for the first three quarters of 2021 to claim an ERC refund. The deadline for filing for the 2021 Form 941X is April 15, 2025.****
ERC VOLUNTARY DISCLOSURE PROGRAM (VDP)
On Aug. 15, 2024, the IRS introduced updates to its Voluntary Disclosure Program (VDP) specifically addressing ERC claims. Taxpayers who believe they may have submitted erroneous or fraudulent ERC claims are encouraged to consider using the VDP to come forward voluntarily before the IRS initiates an audit or enforcement action.
Through the VDP, taxpayers can correct inaccuracies in their ERC claims and potentially mitigate penalties. The process involves submitting Form 15434, also introduced in August 2024, specifically to address disclosure of issues related to ERC claims. The IRS has made it clear that taxpayers who proactively address these issues under the VDP will be treated more favorably than those who do not, particularly in light of the heightened scrutiny on ERC claims.
ERC claims have been a hot topic in recent years. For assistance in navigating any issue related to ERC claims, please contact GHJ’s Tax Practice.
