IMPORTANT: Congress is considering legislation that, if enacted, would make several changes to the employee retention credit (ERC). Most notably, the legislation would retroactively bar the filing of any new/additional ERC claims after January 31, 2024. Please consult a professional tax advisor with any ERC-related questions or concerns.
The Employee Retention Credit (ERC) was passed into law in 2020 as a way to alleviate the economic strain caused by the COVID-19 pandemic on businesses. As of 2023, this tax credit can still be retroactively claimed on wages paid throughout 2020 and select quarters of 2021. However, with a shift in the IRS’s messaging since the ERC’s initial release, many employers now wonder whether or not they qualify for the credit, and if they do, whether they should claim it.
The U.S. Chamber of Commerce, in partnership with Experian, hosted a panel discussion about the ERC, where industry leaders discussed the current state of the IRS as it handles an influx of ERC claims and examined the ways qualifying businesses can still reap its tax-advantaged benefits.
Where the IRS stands on the ERC in 2023
The IRS is not currently processing ERCs through at least the end of 2023. The pause serves a dual purpose for the IRS: It helps IRS identify a substantial number of fraudulent claims associated with the credit and helps manage the 3.6 million-plus claims that have come in over the last three years.
“In terms of revenue estimates, the joint committee initially scored the credit at … $86 billion combined for 2020 and 2021,” said Tom Cullinan, former Counselor to the IRS Commissioner and current shareholder of Chamberlain Hrdlicka Attorneys at Law.. “As of March, the IRS had … received … claims north of $150 billion, and Wall Street Journal reported … [in October 2023]that the number [was] … closer to $230 billion.”
However, with a possible end to the moratorium in sight, small businesses shouldn’t be discouraged from applying for the credit.
“This [moratorium] doesn’t mean that the ERC program has been shut down,” explained Matt Kelley, the Vice President of Tax Consulting Solutions at Experian Employer Solutions. “It doesn't mean that they're no longer accepting 941-X claims for the credit; they're just not processing their refunds right now.”
Could the ERC deadlines be accelerated?
Though the official deadline to apply for the ERC is slated for April 15, 2024, for 2020 claims and April 15, 2025, for 2021 claims, Cullinan emphasized that it’s best to apply as soon as possible, as those deadlines aren’t set in stone.
“One of the legislative proposals that's floating around is to accelerate the deadline,” Cullinan explained. “They already did one thing retroactive[ly], because initially the credit was supposed to run through the fourth quarter [of] 2021, and then they retroactively said, ‘Nope, only going to the third quarter,’ so there is some history there.”
Despite potentially expedited deadlines, the IRS is committed to reducing the burden for businesses that seek to retract their claim for the ERC credit via its newly announced voluntary disclosure settlement program.
“The IRS has also previewed that they're working on a settlement program that could come out, which… would… be like the other voluntary disclosure programs where you're taking the penalties off the table,” said Watson McLeish, the Senior Vice President for Tax Policy at the U.S. Chamber of Commerce and the panel moderator.
Cullinan notes that this withdrawal option is designed to serve as a support mechanism for the IRS, which is currently dealing with a shortage of resources. This service not only brings reassurance to business owners but also enables the agency to focus more staff on investigating fraud, helping it to efficiently process and file the overwhelming number of backlogged claims it faces.
However, Adam Taplinger, a Business and Corporate Development Specialist at Experian Employer Solutions, urged businesses contemplating withdrawal to view their ERC claim as not necessarily a binary choice of all-or-nothing.
“[It doesn't] … have to be a zero-sum game,” Taplinger said. “[Business owners are] concerned that they need to pull the whole thing back to [comply], and that's just not true. They can take another look.”
Though the official deadline to apply for the ERC is slated for April 15, 2024, for 2020 claims and April 15, 2025, for 2021 claims, Cullinan emphasized that it’s best to apply as soon as possible, as those deadlines aren’t set in stone.
Small businesses face lower ERC audit rates, but longer audit periods
As the panelists noted, the ERC is not intended to hurt or penalize organizations. Rather, its purpose is to ease financial difficulties and enable them to function as they did before the pandemic.
Many business owners are still apprehensive about the possibility of facing audits due to claiming the ERC. However, given that the IRS's 7,000 revenue agents are responsible for all corporations, estates, trusts, and individual filings, the likelihood of an audit is low.
“To audit 1% of the inventory, [the IRS would] have to audit 36,000,” Cullinan said. “They're not going to audit 36,000 claims. They don't have the people to do it.”
While audits are possible, they typically only occur if there are indications of fraudulent application or the business has been referred to the IRS for criminal investigation. However, the duration of IRS audits on businesses might be changing: Despite approaching deadlines to amend claims, these timeframes don’t necessarily determine when the IRS can audit, Kelley said.
“Legislatively, they've extended Q3 of 2021 to be a five-year period for audit,” he added. “That doesn't extend the time to claim it, that's just the audit period extended… They've considered extending all of them out at least five years for all the quarters.”
Uncovering fraud within the 3.6 million ERC claims
There has been considerable debate about the risk of audits stemming from incorrect claims of the Employee Retention Credit. Yet, these concerns are largely a result of fraudulent behavior by unscrupulous organizations, rather than legitimate and eligible businesses. As Cullinan explained, the IRS is dealing with three different types of ERC fraud:
- Clearly ineligible small businesses. While many businesses question whether they were eligible for the credit, certain businesses will not qualify. However, many have attempted to receive the credit anyway.
- Fictitious entities created to claim this credit. To obtain the ERC, some individuals have created non-existent businesses and misrepresented themselves to fraudulently receive benefits.
- Identity theft. Bad actors have stolen businesses' identities by acquiring Taxpayer Identification Numbers (TINs) and other necessary information to file claims as the organization and redirect refund checks to themselves.
However, if your business isn’t acting fraudulently, there isn’t cause for concern, according to Taplinger.
“If … you're thinking about this thoughtfully with regard for the statute and the IRS guidance, then you're not the person the IRS is trying to encourage not to file per all of the things that they've been sending recently,” Taplinger said.
If you’re using a service to claim the credit and want to verify your claims’ accuracy, Kelley recommended choosing a service provider with a tax background — such as a CPA or a JD — that can thoroughly document your claim. He also advised asking questions regarding support in case of an audit and noted that high contingency fees, or those too good to be true, can indicate a bad actor.
Thinking about claiming the ERC? Get the help you need from knowledgeable experts through Experian Employer Services.
