The COVID-19 pandemic hit businesses hard. Many who continued to pay employees even while their gross profits plummeted were offered a hand-up to help bridge the gap.
The Employee Retention Credit was a tax credit designed to help some businesses that were impacted by the COVID-19 pandemic. This refundable credit was available only to businesses meeting a specific requirements list.
But, an avalanche of applications from businesses and individuals who do not qualify for the credit has led to a crack-down on the part of the IRS. Thousands of taxpayers are now learning through an ERC compliance program that they will be responsible for paying back ERC funds that were issued to them in error.
The ERC was a tax credit for businesses impacted by the COVID-19 pandemic, available to those who paid wages to employees between March 12, 2020, and December 31, 2021.
The IRS continues to get ERC credit claims filed via Form 941-X, the Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund. Form 941-X is a form typically used to correct employment taxes. It can be used to correct employee wages, taxable Social Security tips or wages, income tax withheld, or other errors.
Deadlines:
The deadline for applying to receive the Employee Retention Credit for 2020 wages is March 31, 2024.
The deadline for applying to receive the Employee Retention Credit for 2021 wages is March 31, 2025.
In early December 2023, the IRS sent over 20,000 letters to taxpayers, informing them about their disallowed ERC claims. The letters are being sent to businesses and individuals who either did not exist during the tax credit's period of eligibility or who did not have paid employees during that time.
In response to the misuse of the ERC, the IRS announced a Voluntary Disclosure Program on December 21, 2023. This program allows businesses that erroneously claimed the ERC to voluntarily disclose and repay 80% of the received amount without facing penalties or interest charges. The program is set to run through March 22, 2024, as part of the IRS's efforts to combat dubious ERC claims.
Participating in the ERC Voluntary Disclosure Program offers several benefits. Taxpayers need only to repay 80% of the ERC received, with no requirement to repay any interest accrued on the ERC refund. Additionally, there is no need to amend income tax returns to reduce wage expense, and the 20% reduction is not taxable as income. The IRS also guarantees not to charge penalties or interest on the claimed ERC amount if it is paid in full when the signed closing agreement is returned.
Eligibility for the ERC-VDP includes businesses, tax-exempt organizations, and government entities that have processed and paid their ERC claims. Conditions for eligibility also stipulate that the entity is not under IRS audit or criminal investigation and has not had its ERC reversed. The application process involves submitting Form 15434 and, if applicable, ERC-VDP Form SS-10 by March 22, 2024, through the IRS Document Upload Tool.
The IRS has a separate program for people to withdraw their pending ERC claims. This program comes with no interest or penalties. And, if you did file in error, know you are not alone.
The IRS says they've already received over $100 million in withdrawn claims. You can also withdraw your claim if you've received a check from the IRS, but haven't deposited or cashed it yet.
During a December 7th industry call, IRS representatives implored taxpayers who received improper ERC credits not to spend the money. This is because any credits you receive in error need to be paid back.
People who go through the voluntary disclosure process have the advantage of a discount on the repayment. Those accepted through the voluntary disclosure program only need to pay back 80% of the credit they receive.
Not able to pay it back in full right away? The IRS has offered the option of an installment agreement under certain conditions.
The COVID-19 tax credit compliance program will continue into the new year. The sooner people who filed in error correct the issue, the smaller their chances of winding up with interest or penalties.
Rick Fish, Jr., is a former CEO and current COO (Chief Operations Officer) at Complete Payroll, as well as a Managing Partner at the company. Rick is a Certified Payroll Professional (C.P.P) as designated by the American Payroll Association (APA), and a licensed Life, Accident, and Health Insurance Agent. Rick graduated Magna Cum Laude from the State University of New York at Oswego with a B.S. in Accounting.