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).