With the Internal Revenue Service making substantial progress in the ongoing effort related to the Employee Retention Credit (ERC) claims, Commissioner Danny Werfel said the agency has entered a new phase of increasing scrutiny on dubious submissions while renewing consumer warnings against aggressive marketing.
Speaking Tuesday at a special roundtable session of tax professionals in Atlanta, Werfel noted the IRS has shifted efforts after successfully clearing the backlog of valid Employee Retention Credits (ERC) claims. Now, the agency is intensifying compliance work and putting in place additional procedures to deal with fraud in the program.
Werfel told a group of tax professionals dealing with fall-out from aggressive ERC claims that the IRS has increased audit and criminal investigation work on these claims, both on the promoters as well as those businesses filing dubious claims.
“The further we get from the pandemic, we believe the percentage of legitimate claims coming in is declining,” Werfel told attendees at the IRS Nationwide Tax Forum in Atlanta. “Instead, we continue to see more and more questionable claims coming in following the onslaught of misleading marketing from promoters pushing businesses to apply. To address this, the IRS continues to intensify our compliance work in this area.”
The Employee Retention Credit, also sometimes called the Employee Retention Tax Credit or ERTC, is a tax credit enacted to help businesses during the pandemic that was subsequently amended three times by Congress. Many businesses legitimately apply for the credit, but aggressive marketing has overshadowed the program. The period of eligibility for the credit for affected businesses is very limited, covering only between March 13, 2020, and Dec. 31, 2021.
Enacted as part of the CARES Act in 2020, the Employee Retention Credit (ERC) provided much-needed relief to employers during the COVID-19 pandemic, particularly those who were on the fence as to whether they would maintain their payroll. However, with the COVID-19 pandemic largely behind us now, the IRS has taken steps to begin to identify whether employers who claimed the ERC on prior year employment tax returns were actually entitled to the credit and, if so, whether they properly reduced their wage expense deductions for the employment periods in which the credit was claimed.
More recently, the IRS has indicated that it is now aware of third-party ERC promoters who may have nudged employers to claim the ERC even when those employers did not qualify for the credit. On October 19, 2022, the IRS issued an announcement in the Internal Revenue Bulletin, warning employers of these schemes. To the extent the IRS identifies an employer who improperly claimed the ERC when it otherwise did not qualify, the IRS has indicated that it intends to reclaim the credits with penalties and interest. In addition, given the warning shot fired at third-party promoters of ERC schemes, such promoters are now on notice that the IRS may attempt to impose civil penalties or criminal sanctions against them as well under various federal statutes that prohibit unscrupulous promoter and tax-return preparation activities. See, e.g., I.R.C. § 6694 (understatement penalty for unreasonable position or willful or reckless conduct); § 6700 (promoting abusive tax shelters); § 6701 (aiding and abetting an understatement of tax liability).
The Employee Retention Credit – Introduction
Congress acted quickly during the worldwide COVID-19 pandemic to provide hiring and other economic incentives to employers. One particularly helpful relief provision—the employee retention credit (“ERC”)—provided employers with potentially refundable credits for wages that they paid to their employees during certain periods of 2020 and 2021.
Regrettably, Congress’s swift action and subsequent tinkering with the rules and requirements of the ERC left many employers confused as to whether they qualified for the credit in any given calendar quarter. In an attempt to reduce this confusion, this article provides a primer on the ERC including certain applicable rules and eligibility requirements to claim the ERC.
Congress originally enacted the ERC relief provisions on March 27, 2020, as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Pub. L. No. 116-136 (the “CARES Act”). Congress later revised the ERC rules through enactment of: (1) The Taxpayer Certainty and Disaster Relief Act of 2020, Pub. L. No. 116-260 (the “Relief Act”) (enacted December 27, 2020); (2) the American Rescue Plan Act of 2021, Pub. L. No. 117-2 (the “Rescue Plan Act”) (enacted March 11, 2021); and (3) the Infrastructure Investment and Jobs Act, Pub. L. No. 117-58 (the “Infrastructure Act”) (enacted November 15, 2021). The IRS issued guidance on the ERC through FAQs and various Notices.
In March 2022, the Joint Committee on Taxation released a Bluebook on tax legislation enacted in the 116th Congress (JCS-1-22, 3/8/22). On page 315 of this report, there is what I find to be a troubling statement and footnote on how the Employee Retention Credit (ERC) works. The ERC was enacted in March 2020 by the CARES Act and applied to qualified wages from March 13, 2020 through September 30, 2021 (longer for recovery startup businesses). So this credit has been around for a while and widely claimed.
The issue is one I raised in a blog post on 6/4/20. The ERC is fairly complex due to numerous definitions and special rules and changes made when it was extended and one change enacted in December 2020 was retroactive. The ERC works differently depending if the employer is large or small based on number of full-time employees.
The Internal Revenue Service today issued guidance for employers claiming the employee retention credit under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), as modified by the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act), for calendar quarters in 2020. The guidance in Notice 2021-20 PDF is similar to the information in the employee retention credit FAQs, but includes clarifications and describes retroactive changes under the new law applicable to 2020, primarily relating to expanded eligibility for the credit.
For 2020, the employee retention credit can be claimed by employers who paid qualified wages after March 12, 2020, and before January 1, 2021, and who experienced a full or partial suspension of their operations or a significant decline in gross receipts. The credit is equal to 50 percent of qualified wages paid, including qualified health plan expenses, for up to $10,000 per employee in 2020. The maximum credit available for each employee is $5,000 in 2020.
Having been in the taxation and tax policy field for over 30 years, I’ve spent a lot of time studying, researching, speaking, testifying and writing about tax reform. Since early March 2020 with the COVID administrative and legislative changes and proposals, I can’t recall a busier and more complex time so far as tax changes go. There have been a lot of changes enacted quickly. Drafters are doing a great job. Issues easily arise as to interpretation though due to lack of time for adequate review and discussion prior to enactment and due to the volume of changes. Hopefully areas of confusion can be resolved soon so individuals and businesses in need of the legislated assistance can take advantage of the benefits without worry that they may have to give them back later.
I have spend a lot of time over the past many weeks on the following multi-faceted (complex) provisions:
1st – The required paid sick and medical/family leave for employers with under 500 employees in the Family First Coronavirus Response Act (FFCRA) (PL 116-127; 3/18/20). The required salary payments produce refundable payroll tax credits for the employer. And, equivalent credit is provided for self-employed individuals. Between the Dept. of Labor and IRS, there are about 200 FAQs to help explain these provisions!
The Treasury Department and the Internal Revenue Service launched the Employee Retention Credit, designed to encourage businesses to keep employees on their payroll. The refundable tax credit is 50% of up to $10,000 in wages paid by an eligible employer whose business has been financially impacted by COVID-19.
Does my business qualify to receive the Employee Retention Credit?
The credit is available to all employers regardless of size, including tax-exempt organizations. There are only two exceptions: State and local governments and their instrumentalities and small businesses who take small business loans.
Qualifying employers must fall into one of two categories:
1. The employer’s business is fully or partially suspended by government order due to COVID-19 during the calendar quarter.
2. The employer’s gross receipts are below 50% of the comparable quarter in 2019. Once the employer’s gross receipts go above 80% of a comparable quarter in 2019, they no longer qualify
after the end of that quarter.
These measures are calculated each calendar quarter.