What to Expect: The IRS’s Road Ahead for the Employee Retention Credit

The nation is 10 months into the moratorium on Employee Retention Credit claims, and with the IRS’s recent announcement that it would deny thousands of improper claims, there are no signs of it ending. The IRS is working through more than one million unprocessed claims, and finding that 60 to 70 percent of all claims have an unacceptable level of risk.

As a result, thousands of businesses are discovering the claims they filed through opportunistic ERC promoters may be fraudulent yet have diminishing options to amend them.

With Commissioner Danny Werfel reaffirming the Service’s commitment to expanding its audit campaign and the IRS noting an “aggressive push” to crack down on 2021 claims, many businesses are asking if they should be concerned about their ERC claims.

As a preliminary matter, U.S. businesses should take a critical look at their ERC claims and ask serious questions about the validity of the credit figure submitted and the calculation methodology utilized before they’re faced with an audit that could lead to severe penalties. 

Is The Claim Faulty?

The IRS has released a list of common red flags that business owners should look for regarding their ERC claims. If any of these red flags below apply, or if a business has any doubt at all, they should immediately reach out to a trusted tax advisor as these are the factors the IRS will look for when deciding whether to initiate an investigation:

• Are there too many quarters being claimed? – Did the business claim credits for all quarters or did it claim credits for quarters where you were fully operational?
• Are government orders cited that don’t qualify? – Did the business have a qualifying mandate as the basis for your qualification and can that mandate be tied to an impact to the business?  
• Is the calculation incorrect? – Was an analysis of nominal impact included in the calculation packet received with the tax credit calculation?
• Is the business claiming for unsubstantiated supply chain issues? – If the claim is based on the supply chain, does the business have an analysis of the suppliers’ qualifications which includes relevant mandates and the more-than-nominal impact calculation?

If a business used a legitimate provider, it should have documentation that allows them to easily answer all the questions above. Most promoters will not provide documentation, and when they do, the more-than-nominal impact calculation is a necessary but commonly missed piece. If a business does find their claim to be fraudulent, the avenues for solving it are quickly disappearing.

Dwindling Options

With the close of the recent tax season, businesses are no longer able to amend 2020 ERC claims. In addition, the IRS’s Voluntary Disclosure Program (VDP) – which allowed businesses to give back 80 percent of refunds received without penalty – has since expired.

The IRS noted it may bring back VDP as an extension program but said any resumption will most likely offer reduced rates and less favorable terms. Now, the IRS’s stern focus on audits will eventually lead to enforced collection actions as well as potential criminal cases against taxpayers.

The Service may even seek additional help from Congress to close new claims and extend the statute of limitations for more time to pursue improper claims.

Potential Solutions

The IRS has provided several avenues for business owners to continue to remediate their claims if they are faulty. The ability to withdraw an ERC claim is still available to those taxpayer businesses that, among other factors, have not received monies from their tax credit claim and want to withdraw the entire amount of the credit. In addition, if the business believes they are entitled to some but not all of the original ERC claim, it is not too late to amend ERC claims for tax quarters in 2021.

If the opportunity to withdraw (or participate previously in the VDP) is no longer available because a business’s ERC claim has been disallowed, there are still options. The IRS has short- and long-term payment plans, as well as the ‘Offer in Compromise’ program, which provides avenues for additional time to pay and even settle the balance for a lesser amount.

The Path Forward for ERC

Both the IRS and taxpayers must act swiftly to resolve their own outstanding ERC issues.

The IRS’s path forward on compliance is clear. The agency has digitized most (if not all) claims and will likely now focus on maximum use of its enhanced analytics and issuing disallowance letters related to tax year 2021, continuing to both broaden and intensify its audit and investigatory scope related to ERC, while also dedicating additional work to getting valid claims paid.

For American businesses, any that are not confident their ERC claims will survive IRS scrutiny must act now to mitigate issues that will only compound with time and inaction.