On January 31, 2024, in a strong bipartisan vote, the U.S. House of Representatives approved the Tax Relief for American Families and Workers Act of 2024 (H.R. 7024). The Act contains provisions benefitting individuals and businesses. To “pay for” these tax benefits, the Act authorizes the termination of the Employee Retention Credit (ERC) program effective January 31, 2024. If passed by the Senate in its current form, no ERC claims can be filed after the termination date. It is unknown at this time if and when the Senate will discuss this legislation and potentially modify it. If passed by the Senate a retro-active termination date may still apply.
As Congress works to potentially end the troubled ERC program the IRS is offering businesses that filed dubious or erroneous claims several new ways to withdraw those claims without penalty. These new programs are part of an ongoing IRS response to aggressive marketing schemes that misled many employers to file large ERC claims—sometimes for hundreds of thousands of dollars—resulting in credits and refunds they were not qualified to receive.
Unpacking 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” 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 (To protect taxpayers from scams, IRS orders immediate stop to new Employee Retention Credit processing amid surge of questionable claims; concerns from tax pros) 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 Dec. 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 a more than 20,000 ineligible claims (IRS expands work on aggressive Employee Retention Credit claims; 20,000 disallowance letters being mailed, more action and voluntary disclosure program coming) 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 offers 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. You can find more information about the withdrawal process at Withdraw an Employee Retention Credit (ERC) claim.
Repaying a Credit Claimed in Error
The IRS has introduced a new voluntary disclosure program 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 penalties and interest will apply from the agreement date.
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.
The IRS requires employers to provide the names, addresses, and telephone numbers of any advisors who assisted with the claim along with details about their services.
This voluntary disclosure program runs only through March 22, 2024, so businesses that have doubts about an already received ERC refund should talk to their tax professional quickly. You can learn more about the program at Employee Retention Credit – Voluntary Disclosure Program.