The IRS recently announced new ways for businesses that filed incorrect Employee Retention Credit (ERC) claims to withdraw those claims without receiving a penalty. These new options are one aspect of the IRS’ response to extensive marketing ploys that misleadingly encouraged employers to file sizable ERC claims – sometimes more than $100,000 – for credits that they were not eligible for.

Understanding the ERC

The ERC is a refundable tax credit designed for businesses that continued paying employees during the COVID-19 pandemic even though a government order fully or partially suspended their business operations, or they experienced a significant decline in revenue during the eligibility period from March 2020 through September 2021.

Unfortunately, unscrupulous ERC “consultants” soon began urging businesses to file questionable claims, pressuring or misleading them with promises of huge payouts, while often charging them a contingency fee based on a percentage of the credit received. In addition, consultants often failed to alert claimants that the refunds need to be reported as taxable income. As a result, employers sometimes neglected to inform their regular tax preparers so they could prepare the necessary amended returns.

As the ERC scams grew, the IRS launched criminal investigations into hundreds of promoters and businesses filing dubious claims. In September 2023, it announced a moratorium on the processing of new claims along with more detailed compliance reviews of existing claims.

Facing intensified reviews and potential audits, employers who had filed erroneous claims at the urging of promoters started trying to undo their actions. In October 2023, the IRS introduced a special withdrawal process for employers with questionable pending ERC claims. Then, on December 21, 2023, it announced a new program that will allow businesses whose sketchy claims the IRS had already paid to repay those claims without penalty.

IRS Disallowance Letters

The IRS disposed of more than 20,000 ineligible claims in early December 2023 when it disallowed these businesses’ ERC claims. These disallowance letters went to claimants that either were not in business during the eligibility period or did not pay any qualified wages during that time.

At the end of December, the IRS announced it will be sending up to another 20,000 letters to employers who claimed an erroneous or excessive credit. These letters will include proposed tax adjustments to recapture erroneously claimed credits filed for tax year 2020. Additional mailings will cover tax year 2021.

Withdrawing a Pending Claim

For businesses that have not yet received disallowance letters, the IRS is offering the opportunity to withdraw pending ERC claims without penalty, provided all the following apply:

• The company made the claim on an adjusted employment return (Forms 941-X, 943-X, 944-X, CT-1X).
• It filed the adjusted return only to claim the ERC and made no other adjustments.
• It wants to withdraw the entire amount of their ERC claim.
• The IRS has not yet paid the claim. Or, if paid, the company hasn’t cashed the refund check.

Companies that withdraw their claims will be treated as if they never filed them. The IRS will not impose penalties or interest, although it notes that those who “willfully filed a fraudulent claim” could still face potential criminal investigation. There is a separate withdrawal process for claims that are already under audit.

The IRS has yet to announce a termination date for this program but by late December, it had already received withdrawal requests for more than $100 million in claims. more information about the withdrawal process is available at https://www.irs.gov/newsroom/withdraw-an-employee-retention-credit-erc-claim

Repaying a Credit Claimed in Error

The IRS has introduced a new Voluntary Disclosure Program (VDP) for companies that have already received payment for erroneous ERC claims. This program will allow companies to pay back the money without interest or penalties. What’s more, because many ERC promoters charged a percentage fee, the IRS will allow recipients to repay only 80 percent of the credit they received.

If an employer is unable to repay the entire 80 percent at once, it can apply for an installment agreement on a case-by-case basis, although there will be penalties and interest in such cases.

Employers that received ERC refunds they weren’t entitled to can apply for the voluntary repayment program if the following conditions are met:

• The employer is not under criminal investigation and has not been notified that it is.
• It is not under an IRS employment tax examination for the tax period involved.
• It has not received an IRS notice and demand for repayment of any of the ERC.
• The IRS has not received information about the taxpayer’s noncompliance from a third party or enforcement action.

For employers to request cancellation of a claim, the IRS requires the names, addresses, phone numbers, and details on services provided by all advisors who helped with the claim.

Applications for the VDP program, which is voluntary, must be made by March 22, 2024.

More on the program is available at
https://www.irs.gov/coronavirus/employee-retention-credit-voluntary-disclosure-program

Have questions about your ERC claims, whether they were valid, and how to proceed in the event that they were not? Dembo Jones can help. Contact us today to review your ERC claims.