While Covid-19 relief appropriations have been crucial in aiding many businesses from the brink of demise, an upsurge of associated fraud, specifically with respect to claims for the employee retention credit (ERC), has emerged. Given the IRS’s intensified scrutiny on ERC claims, taxpayers who believe they have filed inaccurate or unsubstantiated ERC claims need to contemplate their future course of action.
In a bid to mitigate the potential concerns of taxpayers, the IRS, in October, introduced a withdrawal process for small business owners and other taxpayers. This mechanism allows them to retract their claims to avert future repayment of the credit, along with possible interest and penalties, provided they haven’t yet received the refund. However, this does not restrict potential criminal prosecution against fraudulent claimants.
There are certain eligibility criteria to utilize the ERC withdrawal option, including the type of claim form (adjusted employment tax return) used and the condition that no other adjustments were made on their adjusted return apart from claiming the ERC. Besides, this withdrawal option can only be exercised before the claim amount has been disbursed or if it has been paid but not cashed or deposited by the taxpayer.
The taxpayer should have all the necessary documentation such as a relevant governmental order, records which corroborate suspension of significant business operations by a government order and records demonstrating a significant decline in gross receipts to substantiate an ERC claim.
Taxpayers are advised to look out for certain red flags such as sudden closing of the ERC provider upon the announcement of the ERC moratorium and the withdrawal program. Additionally, claiming the credit for all possible quarters and misapplication of aggregation rules, particularly in cases of multiple subsidiaries, are warning signs that a business may wish to withdraw their ERC claim.
When Congress first offered the ERC in 2020, it did not foresee a potential glitch in the program that led to ambiguity around the year in which taxpayers should decrease deductible wage expenses. Unethical promoters have often not informed businesses that ERC disallowance rules generally call for the reduction of deductible wage expenses by the amount of the ERC.
Furthermore, businesses that may still be struggling economically, despite having received their ERC funds, have been offered a lifeline. In mid-December, Commissioner Danny Werfel approved the ERC voluntary disclosure program, which provides a streamlined avenue for taxpayers to return funds and receive a 20% reduction in the amount to return.
Consulting a third-party tax professional to scrutinize the ERC filing and deciding whether to engage with the IRS’s new withdrawal or voluntary disclosure programs are strongly recommended. Prompt action in verifying the legitimacy of a submitted ERC claim, rather than waiting for a potential IRS audit, will enable taxpayer businesses to effectively handle these types of claims in the future.
For more details, please refer to the original article written by Eric Hylton, National Director of Compliance for Alliantgroup and former IRS commissioner of the small business/self-employed division and former deputy chief of IRS Criminal Investigation, on Bloomberg Tax.