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Recent IRS warnings and announcements regarding the Employee Retention Credit (ERC) have raised some businesses’ concerns about the validity of their claims for this valuable, but complex, pandemic-related credit — and the potential consequences of an invalid claim. In response, the IRS has rolled out a new process certain employers can use to withdraw their claims.
The ERC is a refundable tax credit intended for businesses that 1) continued paying employees while they were shut down due to the pandemic in 2020 and 2021, or 2) suffered significant declines in gross receipts from March 13, 2020, to Dec. 31, 2021. Eligible employers can file claims until April 15, 2025 (on amended returns), and receive credits worth up to $26,000 per retained employee.
With such potentially large payouts, fraudulent promoters and marketers were quick to rush in with offers to help businesses file claims in exchange for fees in the thousands of dollars or for a percentage of any refunds received. The requirements for the credit are strict, though, and the IRS has found that many of these claims fall short of meeting them.
Invalid claims put taxpayers at risk of liability for credit repayment, penalties and interest, in addition to the promoter’s fees. And promoters may leave out key details, which could lead to what the IRS describes as a “domino effect of tax problems” for unsuspecting employers.
The wave of fraudulent claims has produced escalating action from the IRS. In July 2023, the agency announced it was shifting its ERC review focus to compliance concerns, with intensified audits and criminal investigations of both promoters and businesses filing suspect claims. Two months later, it imposed a moratorium on the processing of new ERC claims.
The moratorium, prompted by “a flood of ineligible claims,” will last until at least the end of 2023. The processing of legitimate claims filed before September 14 will continue during the moratorium period but at a much slower pace. The IRS has extended the standard processing goal of 90 days to 180 days and potentially far longer for claims flagged for further review or audit.
According to the IRS, though, the moratorium isn’t deterring the scammers. It reports they’ve already revised their pitches, pushing employers that submit ERC claims to take out costly upfront loans in anticipation of delayed refunds.
Now, the IRS has unveiled a new withdrawal option for eligible employers that filed claims but haven’t yet received, cashed or deposited refunds. Withdrawn claims will be treated as if they were never filed, so taxpayers need not fear repayment, penalties or interest. (The IRS also is developing assistance for employers that were misled into claiming the ERC and have already received payment.)
The withdrawal option is available if these three conditions are met:
The exact steps vary depending on your circumstances, including whether you filed your claim yourself or through a payroll provider, have been notified you’re under audit or have received a refund check that you haven’t cashed or deposited. Regardless of the applicable procedure, your withdrawal isn’t effective until you receive an acceptance letter from the IRS.
Taxpayers who aren’t eligible for the withdrawal process can reduce or eliminate their ERC claim by filing an amended return. But you may need to amend your income tax return even if your claim is withdrawn.
Throughout its warnings about potential ERC pitfalls, the IRS has continued to urge taxpayers to consult “trusted tax professionals.” If you’re having second thoughts about your ERC claim, Doeren Mayhew’s ERC advisors can help you review your claim and, if appropriate, properly withdraw it. Contact us today to learn more.
This publication is distributed for informational purposes only, with the understanding that Doeren Mayhew is not rendering legal, accounting, or other professional opinions on specific facts for matters, and, accordingly, assumes no liability whatsoever in connection with its use. Should the reader have any questions regarding any of the news articles, it is recommended that a Doeren Mayhew representative be contacted.
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