IRS Program Allows Employers to Correct a Mistaken Tax Credit

The IRS has announced a new voluntary disclosure program for employers that erroneously claimed the employee retention credit (ERC). The refundable tax credit was meant to help businesses that struggled when some state and local governments required nonessential businesses to close or cancel events during the pandemic.

However, many employers that were not actually eligible for the credit applied for and received funds. Many were duped by scammers who gave them false information and urged them to apply. The disclosure program is open through March 22.

Employers can withdraw their ERC claim if they haven’t already gotten the money, and they will be treated like there was never a claim, according to Starling Marshall, an attorney with Crowell & Moring in New York City. If the employer already received the money, it can complete the voluntary disclosure paperwork and pay 80 percent of the total credit back.

However, if the employer keeps the money, it could get audited, and the IRS could determine that the employer received the tax credit in error. Then the employer would have to refund 100 percent of the total credit plus interest and any potential penalties, Marshall said.

“In cases of fraud, an employer could also face a criminal investigation and possible prosecution for submitting a false tax claim to the IRS,” said Matthew Lee, an attorney with Fox Rothschild in Philadelphia.

“Practically speaking, this program presents a brief window of opportunity for employers to take a close look at their ERC submissions and confirm their eligibility,” said Matthew Chiarello, an attorney with Snell & Wilmer in Phoenix. “It may be worthwhile to work through the eligibility requirements with fresh eyes and confirm the credit calculations with legal, accounting, and HR input.” 

Who Is Eligible?

To be eligible for the tax credit, a business must meet one of these three criteria:

• It sustained a full or partial suspension of operations due to a government order limiting commerce, travel or group meetings because of COVID-19 during 2020 or the first three quarters of 2021.
• It experienced a significant decline in gross revenue during 2020 or a decline in gross revenue during the first three quarters of 2021.
• It qualified as a recovery startup business for the third or fourth quarters of 2021.

Government agencies are not eligible, nor are employers that experienced supply chain disruptions but did not experience a suspension of operations due to a government order, according to the IRS.

It may be difficult for an employer to determine if its revenue downturn or operations slowdown was significant enough to qualify for the tax credit.

“I don’t know how many people are really sure they shouldn’t have gotten this money. People are still confused about the proper bases for this credit,” Marshall said.

Making the confusion worse was a slew of marketers that heavily advertised to get businesses to apply for the tax credit, even if they didn’t qualify.

“There has been some really aggressive marketing,” Marshall said. “There’s been a lot of companies that marketed, ‘You may be eligible for millions of dollars in ERC money.’ That’s hard to turn down. A lot of them are taking a percentage of whatever you get paid, or they’re taking a percentage of whatever was the estimate of what you might get paid.”

She recommended employers work with a trusted tax advisor who will not benefit if the employer does not qualify for the credit.

The marketers “sold eligibility opinions to business for exorbitant fees—often a percentage of the tax credit claimed by the business. Many of these eligibility determinations are bare-bones and unsupportable, and will not likely withstand scrutiny by the IRS,” Lee said.

Employers cannot claim the ERC on wages that were reported as payroll costs for Paycheck Protection Program (PPP) loan forgiveness.

“It is not atypical for an employer to have filed in good faith only to realize later that they missed something, such as failing to factor in PPP forgiveness, accounting for the wrong portion of qualified wages, [or] falling short of the eligibility standards in a given quarter,” Chiarello said. “This new IRS program provides the space to be methodical in ensuring eligibility and avoiding potential audit and penalty.”