Did you claim the ERC (Employee Retention Credit) and are you still waiting for it to be processed?
The IRS suspended processing of ERC claims submitted after September 14, 2023, amid allegations of widespread fraud. There is good news for the businesses that were eligible and claimed the ERC but are still waiting for this assistance.
Recently, Internal Revenue Services announced action to help small businesses that filed for the ERC between September 14, 2023 and January 31, 2024. IRS announced that the low-risk ERC claims would be paid out soon. 50,000 applications with presumably valid claims are moving into processing with more scheduled for the fall. The IRS is continuing to work on denials of improper ERC Claims, intensifying audits and pursuing civil criminal investigations of potential fraud and abuse. In August 2024, IRS reopened the Voluntary Disclosure Program (VDP) which had ended in November 2022. The Revised VDP allows businesses to return most of the credit received and avoid audits, penalties, and interest.
Who was eligible for the Employee Retention Credit? Businesses that:
- Experienced a partial or full suspension from operation of business due to a government order due to the COVID-19 pandemic during 2020 or the first three quarters of 2021, or
- Experienced a significant decline in gross receipts during 2020 or first three quarters of 2021, or
- Lastly, qualified as a recovery startup business for the third or fourth quarters of 2021.
Eligible employers must have paid qualified wages to some or all employees after March 12, 2020, and before January 1, 2022. Eligibility and credit amounts vary depending on when the business impacts occurred.
- An Option Available If You Are Still Waiting for ERC Refunds
Taxpayers experiencing hardship as a result of the delayed refund can request assistance from Tax Advocate Services (TAS). TAS is an independent organization within IRS that helps taxpayers to resolve problems. For more information see: https://www.irs.gov/taxpayer-advocate.
ERC- Voluntary Disclosure Program
Because of the number of businesses that received the ERC but were not eligible for assistance, the Internal Revenue Service announced a second Employee Retention Credit Voluntary Disclosure program (ERC-VDP). It is open from August 15 through November 22, 2024 for the returns filed for 2021. The ERC-VDP for 2020 tax periods is no longer available. The second ERC-VDP program allows businesses to correct ineligible Employee Retention Credit (ERC) claims at a discount. The revised Voluntary Disclosure Program requires employers to repay improper ERC credit, but at a 15% discount. The voluntary disclosure allows them to avoid future audits, penalties, and interest on the claim. However, if employers are not able to repay the required 85% of the credit at the time they sign the closing agreement with the IRS, they might be required to enter an alternative payment arrangement such as an installment agreement and may need to pay penalties and interest in connection with that payment arrangement. The first Voluntary Disclosure Program that ended in March resulted in over 2,600 applications from ERC recipients with disclosures totaling $1.09 billion in credits. The IRS promises not to charge program participants interest or penalties on any credits they repay on time.
Who can apply to the second ERC Voluntary Disclosure Program?
Businesses, government entities and tax-exempt organizations are eligible for the second ERC-VDP for each tax period in 2021 if they fall under the following requirements:
- If the 2021 employment tax return has been processed and paid as refund which was already cashed or credited to any tax period
- If the business is entitled to $0 ERC
- If the business is not under employment tax examination or being audited
- If the business does not fall under criminal investigation by IRS
- If the IRS has not reversed or notified you of intent to reverse all or part of the ERC. For instance, if you received a letter or notice from the IRS disallowing your ERC, you would no longer qualify for the ERC-VPD for any quarter covered by the letter.
Business with Dubious claims need to be extra careful
IRS continues working on improper ERC claims, intensifying audits and investigations to prevent improper payments of ERC claims. In recent weeks, the IRS has sent out 28,000 disallowance letters to businesses whose claims showed a high risk of fraud. The IRS estimates that these disallowances will prevent up to $5 billion in improper payments. In July 2024, the IRS initiated 460 fraud cases worth nearly $7 billion; 17 cases resulted in federal convictions so far. Additionally, thousands of claims are under audit. Not only is the IRS investigating suspected employers, but also gathering information about suspected abusive tax preparers and others who improperly promoted the ability to claim ERC.
The IRS has published the most obvious red flags of a possible dubious ERC claim. These include 1) essential businesses operating during the pandemic without a decline in gross receipts, 2) insufficient evidence of government-ordered business suspensions, 3) improper reporting of family members’ wages as qualified wages, 4) double-dipping with Paycheck Protection Program loan forgiveness, and 5) large employers erroneously claiming wages for active employees.
For our clients with valid ERC claims who fell into the moratorium, you should receive payment in the very near future. If you have any concern that your application for the ERC funds might not be accurate, now is the time to review it, because the window is closing on your ability to recall the application and to pay back most of the undeserved funds that you received with no additional repercussions. If our team can assist in any way, please call your tax preparer.
Contributed by Nishat Yasmin
