IRS Employee Retention Credit update — what companies need to know
2024 PRINDBRF 0148
By Christopher Gurley, Esq., Carina Federico, Esq., and S. Starling Marshall, Esq., Crowell & Moring LLP
Practitioner Insights Commentaries
March 19, 2024
(March 19, 2024) - Christopher Gurley, Carina Federico and S. Starling Marshall of Crowell & Moring LLP discuss the focus at the Internal Revenue Service and Congress to address improper Employee Retention Credit claims, which are tax credits to incentivize employers to continue to pay workers while their businesses are affected by COVID-19.
Over the last few months, several important developments occurred which highlighted the Internal Revenue Service's prioritized goal of cracking down on improper Employee Retention Credit (ERC) Claims.
The ERC was created as part of the CARES Act to provide companies with a refundable tax credit to incentivize employers to continue to pay workers while their businesses are affected by COVID-19. The ERC has received a great deal of attention from Congress and the IRS due to concerns about large numbers of potentially improper and fraudulent claims. Since 2020, the agency has uncovered a number of cases of ERC fraud and of vendors running scams offering to help companies obtain the credit.
In March 2023, the IRS placed the ERC on its "Dirty Dozen" list. According to the IRS, its Dirty Dozen list represents the "worst of the worst tax scams." By placing the ERC on its Dirty Dozen list, the IRS signaled an increased focus on enforcement and audit efforts to identify fraud. In September 2023, the IRS issued a moratorium on new claims for at least three months, which was recently extended indefinitely. Additionally, Congress has proposed legislation to curtail fraudulent ERC claims.

Congressional action

The U.S. House of Representatives passed the Tax Relief for American Families and Workers Act of 2024 on Jan. 31, 2024, (the "Act"), and the Act advanced to the Senate. The Act's key provisions include increases in the child tax credit, delay of the requirement to deduct research and experimentation expenditures over a five-year period, extension of 100% bonus depreciation, and other tax provisions. The provisions in the Act are paid for by an accelerated deadline for businesses to file new ERC claims.
The current deadlines to file ERC claims are April 15, 2024, for the 2020 tax year and April 15, 2025, for the 2021 tax year. Under the Act as currently written, new ERC claims are prohibited after Jan. 31, 2024. As Jan. 31 has already passed, the Act could be revised to include a new deadline, which would likely be sometime in 2024.
In addition to limiting ERC claims to those filed before Feb. 1, 2024, the bill also contains provisions that: (1) increase penalties for aiding and abetting the understatement of a tax liability applicable to ERC promoters (third party persons or companies who marketed ERC schemes by exaggerating ERC benefits, misrepresenting eligibility criteria, and overstating potential tax savings which resulted in fraudulent or erroneous tax returns being filed) , (2) increase the paid tax return preparer penalty for failure to comply with due diligence requirements related to the ERC, and (3) include tools that allow the IRS to pursue improper claims that have already been filed, such as an extension on the statute of limitations on assessment.
The legislation paints a clear picture that targeting both promoters and businesses who are suspected of filing fraudulent claims remains the top priority.
Furthermore, the IRS Commissioner recently encouraged Congress to pass legislation assisting further IRS enforcement activities, including:
•A ban on ERC preparers' ability to charge fees based on percentages of the claimed ERC amounts.
•Allowing the IRS to further penalize tax preparers of fraudulent ERC claims.
•Extension of the statute of limitations on assessment for ERC claims.

No end date for IRS moratorium

In fall 2023, the IRS enacted an immediate moratorium on processing new ERC claims received on and after Sept. 14, 2023, which the IRS said was due to an increase in ERC scams and fraud.
The moratorium was initially effective until at least Dec. 31, 2023; however it has now been extended for the foreseeable future. Recently, the IRS Commissioner noted that the IRS has no definitive timetable set to end the moratorium placed on the processing of ERC claims.
The Commissioner acknowledged that existing claims filed prior to Sept. 14, 2023, are still being processed. However, the IRS has experienced significant processing delays due to the sheer volume of fraudulent claims filed in the months prior to Sept. 14, 2023. As a result, an increase in audit efforts and criminal investigations should also be expected.

Claim withdrawals

In October 2023, the IRS announced a new withdrawal process to allow certain employers who filed an ERC claim, but have not yet received a refund, to withdraw their submission, avoiding all civil penalties associated with the filed claim.
While the withdrawal program is still currently active, the IRS has indicated that it may end soon. There has been speculation that the withdrawal program is set to end around the same time that the moratorium on processing new claims ends.

IRS voluntary disclosure program

The IRS announced a new voluntary disclosure program (VDP) for employers that made erroneous ERC claims. Ineligible employers that have received ERC refunds now have the opportunity to apply for the program, which is open through March 22, 2024.
If accepted into the VDP, the employer enters into a closing agreement with the IRS, and repays 80 percent of the refund amount to the IRS. The employer is allowed to keep the remaining 20 percent of the refund amount, and will not be subject to any civil penalties or interest associated with the refund claim.
The employer must identify any third-party consultant, promoter, or return preparer that assisted the employer in evaluating and filing the claim.
The VDP is not available if the employer has been notified that they will be audited or that they are subject to a criminal investigation. Participation in the VDP does not provide any protection from or immunity to a criminal investigation of the employer.

Next steps for companies

With the IRS continuing its heightened focus on the enforcement of improper ERC claims, companies should consider the following moving forward:
•Carefully evaluate your claims in light of the IRS guidance. Taxpayers who improperly claimed ERC may be required to pay back the erroneously claimed ERC amount, resulting in additional tax liabilities, as well as accuracy-related penalties. Taxpayers may also face criminal charges. Taxpayers who claimed the ERC credit though a promoter who is under investigation likely will face scrutiny through audit.
•Eligible businesses that are considering filing ERC claims should proceed with caution.
•If you are concerned about the validity of your claims, or you fear you may have miscalculated your amounts, consider participating in the IRS's upcoming self-disclosure program to avoid penalties. However, you must act quickly before the program expires.
•If you have submitted a claim about which you have concerns, but have not yet received payment, consider participating in the claims' withdrawal program.
•Anticipate increased processing times for your claim. The IRS stated that its standard processing goal for existing ERC claims will go from 90 days to 180 days, and the time to process a claim could be much longer if the claim faces further review or audit.
By Christopher Gurley, Esq., Carina Federico, Esq., and S. Starling Marshall, Esq., Crowell & Moring LLP
Christopher Gurley is an associate in Crowell & Moring's Los Angeles and Orange County offices, where he practices in the tax group. His practice focuses on both federal and state tax controversy and litigation, and he guides clients through all stages of tax controversies, from Internal Revenue Service audits to administrative appeals, alternative dispute resolution proceedings, and litigation. He can be reached at [email protected]. Carina Federico is a partner in the tax group in the firm's Washington, D.C., office, where she advises on wide-ranging, complex tax issues, including transfer pricing, investment tax credits, research and experimentation credits, and energy credits. She handles tax disputes at all stages, including IRS audits, IRS Appeals, federal district court litigation, tax court litigation, and appellate court litigation across the United States. She can be reached at [email protected]. S. Starling Marshall is a partner in the firm's litigation and tax groups in the firm's New York office. In addition to representing clients in all stages of litigation, she guides clients through complex IRS audits and administrative appeals, provides tax-related advice, conducts internal investigations, and represents individuals and corporate entities in criminal tax matters. She can be reached at [email protected].
Image 1 within IRS Employee Retention Credit update — what companies need to knowChristopher Gurley
Image 2 within IRS Employee Retention Credit update — what companies need to knowCarina Federico
Image 3 within IRS Employee Retention Credit update — what companies need to knowS. Starling Marshall
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