The Internal Revenue Service's (IRS) warnings to businesses have taken on renewed urgency. With the March 22 deadline fast approaching, businesses are called upon to review the Employee Retention Credit (ERC) guidelines. The IRS warnings aim to prevent future complications associated with non-compliant claims.
Aggressive marketing has led many businesses to file for ERC claims. In response, the IRS has bolstered its compliance actions, increasing audits and criminal investigations and planning more initiatives in the future. The IRS has made a limited-time offer until March 22, allowing employers to amend their erroneous claims with significant discounts.
Will the Window of Opportunity Close for Those with Questionable Claims?
IRS Commissioner Danny Werfel has emphasized that this window of opportunity is closing fast. Businesses with dubious claims must rectify issues before follow-up compliance actions kick in. The advice is to review ERC guidelines, particularly for companies with high-pressure incentives to apply for these credits. Early action could prevent costly penalties and interest when the IRS response begins.
The options available are beneficial, but the IRS warns that the costs and risks associated with false claims will increase sharply over time.
Can Employers Dodge Penalties and Interest?
Employers who have wrongly claimed ERC can avoid interest and penalties. An additional bonus is a discount on repayments if they apply to the ERC Voluntary Disclosure Program by March 22, 2024.
The IRS offers a unique claim withdrawal mechanism for businesses whose claims are still active. By immediately resolving these issues, companies can correct their course and prevent future steps carried out by the IRS.
Are There Misrepresentation Problems with ERC Promoters?
Authorities have urged businesses to review their records carefully. Some ERC promoters have used misleading information and incorrectly represented eligibility rules, luring businesses into applying for the ERC even if they did not qualify.
What Solutions Does the IRS Offer?
The IRS offers two programs designed to resolve incorrect claims voluntarily and reduce the following costs and steps for businesses that received misinformation about the ERC.
The ERC Voluntary Disclosure Program (March 22, 2024 deadline) is designed for employers who must return the ERC they received by December 21, 2023. This return can be in the form of a refund or as a credit in their tax return. Accordingly, taxpayers can repay the wrongful ERC less than 20 percent for any tax period they were not eligible for the ERC.
Businesses should quickly use the claim withdrawal process if they need the IRS not to process a claim for any unpaid tax period. Those who received an ERC check but have not cashed it can use the process to withdraw the claim and return the check. The IRS will process the claim as though the taxpayer never filed it, with no associated interest or penalties.
What Will Happen Once These Programs End?
After these programs end, the IRS continues with a wide array of tax compliance activities concerning ERC claims to safeguard taxpayers and enforce tax laws. If the IRS finds an ERC claim incorrect after these programs end, it can disregard unpaid claims.
Notably, a business that wrongly claimed and received $50,000 for a tax period when it wasn't supposed to receive any ERC would need to repay only $40,000 after the program's 20% discount.
Only if the taxpayer pays the entire sum will there be no penalties or interest. On the contrary, if the business doesn't apply to the VDP and the IRS identifies an incorrect claim, the industry would owe $50,000. It might also accrue penalties and interest computed from when the company received the ERC.
Moreover, where the business received the ERC two to three years ago, interest compounded daily, and the failure-to-pay penalty accrued monthly, potentially building up to 25%. Diverse penalties apply under definite scenarios, making it far more expensive than the available voluntary options.
Taxpayers who cannot pay the full ERC minus 20% can still sign up for the ERC Voluntary Disclosure Program and request an Installment Agreement to pay over time.
The Status of Processing New Claims
Amid concerns over aggressive ERC marketing, the IRS stopped processing fresh claims on September 14, 2023. The agency has yet to fix a definite resumption date. However, the IRS continues to process ERC claims submitted before the moratorium, albeit significantly slower than when it revamped its approach last year.
