Review Your ERC COMPLIANCE

Review Your

ERC COMPLIANCE

WITH OUR ERC TAX CREDIT EXPERTS

Concerned about the validity of your ERC filing?  Review your compliance with

Legacy Tax & Resolution Services' tax credit experts –

before the IRS does!

IRS ISSUE WARNING

As of September 14th, 2023 the IRS has announced an immediate stop to processing any new ERC claims until the end of the year after experiencing a rise in "ERC mill" fraudulent claims.

Why Review Your ERC Claim Now?

The Rise of ERC Scams

Dubious tax credit pop-ups, recently dubbed "ERC Mills," advise businesses to claim Employee Retention Credits they don't qualify for.  Many of these companies do not appropriately analyze the business' qualifications.

Increased Audit Risk

The IRS has begun targeting abusive ERC claims by sending IDRs (Information Document Requests) to businesses with unsubstantiated claims.  Many companies have already had their ERC audited, and a new IRS ERC mill warning cautions employers to take extra care when vetting companies that promote the credit.

Businesses that file improperly through a questionable tax credit provider are at risk of penalties and interest.  As ERC audits are on the rise, business owners should have their filings double-checked by an experienced and trusted firm while there is still time to correct any improperly claimed credits.

IRS Urges Deeper Review

The IRS has escalated its response to this issue by immediately suspending the processing of any new ERC claims until the end of the year, emphasizing the need for businesses to exercise caution and ensure the legitimacy of their claims to avoid penalties and interest.  Business owners are strongly urged to have their ERC filings reviewed by reputable and experienced firms to rectify any improperly claimed credits during this temporary halt in processing.

What are the chances of an ERC audit?

The chances of an ERC audit depend on various factors, including your business's eligibility, how the credit was calculated, and the documentation provided to support the claim. The key to avoid an audit is to ensure your companies claim is legitimate and that all your tax affairs are in order.

Let's look at audit prevention in more detail to give you some steps to follow...

How to prevent IRS ERC audits: Reducing ERC audit risk

Unfortunately, there’s no foolproof method of avoiding IRS ERC audits.

However, we recommend you do these things to lower ERC audit risk:

1. Review the IRS guidelines

While this might sound the most obvious thing to do, you’ll be surprised at how many people don’t check the most recent IRS guidelines.

They’re updated regularly, but I totally understand that you either don’t have the time to check them or need more clarification on what exactly the guidelines mean.

Nevertheless, just a glance through them might trigger you to question whether you’re compliant or not.

2. Use a reputable tax professional

Working with a reputable tax professional, like the team here at Legacy Tax & Resolution Services, ensures you’re accurately claiming the credit and meeting the eligibility requirements, which are two big factors for being flagged for an employee retention credit audit.

In addition, we can also help businesses navigate any potential ERTC audits or IRS requests for documentation.

3. Document ERTC calculations

Having all documentation to FULLY Support your claim may just prevent them from needing to complete a full ERC tax credit audit.

And, even if an audit still occurs, the documentation will help clarify any inconsistencies and ensure the process is less painful than it needs to be.

4. Double-check ERTC calculations

As a responsible person in your business, you should double-check ERTC calculations to ensure their accuracy. Any errors or discrepancies in their claim may increase the risk of an audit.

5. Respond to any IRS requests promptly

If the IRS requests additional documentation to verify your ERTC claim, respond promptly and provide the requested documentation. Delaying or ignoring an IRS request could significantly increase the risk of an audit.

ERC Statute of limitations: What is the ERC audit period?

The ERTC statute of limitations is 3 years from the date the tax return was filed or the due date of the return, whichever is later.

However, if you've filed an amended return, the ERC audit statute of limitations starts from the amended return file date.

On top of that, the statute of limitations for auditing the ERC depends on various factors:

• Type of tax return filed
• Whether you’ve filed an amended return
• Audit circumstances

If fraud or intentional misrepresentation is suspected, the IRS can audit the business at any time, regardless of any statute of limitations.

See the extension of the statute for ERC below

ERC audit penalty guidance:

An ERC audit penalty can result in additional tax liabilities, interest charges, and potential legal consequences:

• Underpayment of taxes: Businesses may be required to pay back the erroneously claimed ERC amount, resulting in additional tax liabilities.
• Accuracy-related penalties: In cases where the IRS deems that the errors were due to negligence, disregard of tax rules, or substantial understatement of income, accuracy-related penalties may be imposed. These penalties are calculated as a percentage of the underpaid taxes.
• Interest charges: The IRS may assess interest charges on the underpaid taxes from the due date of the tax return until the date of payment.
• Potential legal consequences: In cases of intentional fraud or willful misconduct, businesses may face criminal charges, including fines and imprisonment.

What is the penalty for false ERC claims?

The penalty for false ERC claims is 20% of the excessive amount claimed. For example, if your ERC claim is $6,000 but, in actuality, your eligible amount was only $5,000, the excessive amount is $1,000 and your penalty is $200 (20% of $1,000).

In addition, the IRS may apply an "accuracy-related penalty if there is not a reasonable cause." Moreover, interest on any ERC penalty could be applied

Note that this penalty isn't specific to the ERC but is the IRS' general guidance on false credit claims.

Mitigating the Risk of ERC Audit Penalties:
 

To minimize the risk of ERC audit penalties, it's essential for businesses to:

• Maintain accurate documentation: Keep thorough records and documentation supporting the eligibility criteria for the ERC, including evidence of qualified wages and the impact of the COVID-19 pandemic on your business operations.
• Seek professional assistance: Consider working with experienced tax professionals, such as Legacy Tax & Resolution Services, which specializes in ERC matters and can provide guidance and ensure compliance with IRS regulations.
• Conduct internal reviews: Regularly review and reconcile your ERC claims to identify any potential errors or inconsistencies proactively. This can help address issues before they become a cause for concern during an audit.

Employers may be subject to government refund suits for employee retention credits even after the normal three-year statute of limitations expires

• Employers should be aware that the IRS could challenge previously paid employee retention credit refunds under the so-called erroneous refund provisions.
• Notwithstanding any other statute of limitations, the government has two years from when it pays an employee retention credit refund to bring suit to recover the refund if it later determines the taxpayer was ineligible.
• This has been a topic of discussion among practitioners.

While the general three-year statute of limitations on assessment will expire on April 15, 2024, for 2020 employee retention credit claims (and April 15, 2025, for 2021 claims), the IRS has an additional two years from issuance of any refund to seek its repayment in court, even if the general three-year statute of limitations has expired.

Employee retention credit

The employee retention credit is a refundable federal employment tax credit that was first enacted as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in 2020 and was repeatedly modified and extended. Under current law, the credit is available for qualified wages paid by eligible employers between March 13, 2020, and September 30, 2021.

Many employers claimed and continue to claim the credit by amending Forms 941, Employer's QUARTERLY Federal Tax Return, and requesting refunds. While many of those refund claims already have been paid, others are still pending. The backlog not only results from the high volume of refund claims and COVID-related processing disruptions but also IRS concerns about the legitimacy of many of the refund claims.1 Indeed, aggressive promotion of the employee retention credit was at the top of the IRS's "Dirty Dozen" list of tax scams for 2023.

Statute of limitations

General statute of limitations for FICA taxes and federal income tax withholding

Most tax practitioners are familiar with the general three-year statute of limitations under IRC Section 6501, which applies to the assessment of tax by the IRS. The same three-year period generally applies to FICA taxes (composed of Social Security, Medicare and Additional Medicare taxes) and federal income tax withholding, which are generally reported on a Form 941, subject to a special rule under IRC Section 6501(b)(2) and IRC Section 6513(c) for when the three-year period begins. Under that special rule, for any Form 941 filed by April 15 of the following calendar year, the three-year statute of limitations begins on April 15. For example, the statute of limitations for all four Forms 941 filed for 2020 generally would expire on April 15, 2024, and the statute of limitations for all four Forms 941 filed for 2021 generally would expire on April 15, 2025.

Five-year statute of limitations for the third quarter of 2021 and related "Greenbook" proposal

A special five-year statute of limitations applies to IRS assessments for the third quarter of 2021. This single-quarter anomaly arose from the manner in which the employee retention credit evolved over time. As originally enacted under the CARES Act, the credit would have expired at the end of 2020. The Taxpayer Certainty and Disaster Tax Relief Act of 2020, however, significantly enhanced and extended the credit through the first half of 2021. The American Rescue Plan Act of 2021 modified the credit further and extended it through the end of 2021. It also extended the statute of limitations for IRS assessments to five years for employee retention credit claims for the second half of 2021. The Infrastructure Investment and Jobs Act, however, retroactively repealed the credit as of the end of the third quarter of 2021. The five-year statute of limitations on assessment for the third quarter of 2021, much like the retroactive repeal of the credit for the fourth quarter of 2021, could reflect growing skepticism of the legitimacy of employee retention credits in the second half of 2021.

The Treasury Department's 2024 "Greenbook" (officially, "General Explanations of the Administration's Fiscal Year 2024 Revenue Proposals"), which was published on March 9, 2023, includes a proposal to apply the five-year statute of limitations on employee retention credit tax assessments to all the quarters for which the credit was available. The rationale for this proposal includes the following explanation:

[T]he majority of dollars of ERTC claims were made on amended returns, often with a substantial delay relative to the quarter of the underlying activity that generated the credit. As the current-law three-year limitations period applicable to … the CARES Act ERTC does not restart when an amended return is filed, a three-year assessment period makes it difficult for the IRS to audit the amended returns and timely assess any tax, if warranted.

It is presently unclear whether this proposal will be enacted. In the meantime, the anomalous five-year statute of limitations (which, recall, applies only to tax assessments by the IRS and not to refund claims by taxpayers) applies only for the third quarter of 2021.

Civil action for recovery of erroneous refunds

Despite all the attention the employee retention credit has received, there has been very little discussion of IRC Section 7405(b), which allows the government to bring a civil action to recover any portion of a tax imposed by the Internal Revenue Code that was erroneously refunded. To prevail in an action under IRC Section 7405(b), the government must prove that (1) a refund was made to a taxpayer, (2) the refund was erroneously issued, and (3) the lawsuit to recover the erroneously issued refund was timely filed.  Such actions are broadly used to recoup refunds that were "erroneously" issued. This error might, for example, be a clerical error, or alternatively, an error as to the taxpayer's legal entitlement to the refund.  Under IRC Sections 7405(d) and 6532(b), the statute of limitations for bringing such an action is generally two years from the making of the refund but extends to five years for fraud or misrepresentation of a material fact. (Similarly, a taxpayer can bring a refund suit under IRC Section 6532(a), beginning six months from the date of filing a refund claim and ending two years from the IRS's disallowance of the claim.)

Implications

It is too early to tell whether or to what extent the government will use its IRC Section 7405(b) authority in the context of employee retention credit claims. Until the statute of limitations expires under IRC Section 7405(d) and IRC Section 6532(b), employers should be aware that the government may use the erroneous refund provisions to seek repayment of employee retention credits the IRS has paid them, even if the general three-year statute of limitations on assessment has expired for the Forms 941 to which the credits relate. The following chart summarizes the statutes of limitations under current law, assuming there has been no fraud or misrepresentation of any material facts:

The fact that the IRS pays an employer's claim for the employee retention credit does not mean that the IRS agrees the employer is actually entitled to it. Only after the relevant statutes of limitations have expired can the employer take comfort in knowing that its refund claim will not be challenged by the government. This lingering uncertainty presents challenges with respect to income tax returns on which IRC Section 280C disallows an amount equal to the dollar amount of the credit from the taxpayer's compensation deduction for the same tax year. Depending on when the employee retention credit refund is received, taxpayers may want to consider filing a protective claim for income tax refund to allow the IRC Section 280C disallowance to be reversed in the event the refund is later recouped as erroneous. Finally, there may be implications for an employer's internal financial planning as well as its external financial statement reporting.

How Can Businesses Determine Their ERC Eligibility Moving Forward?

The IRS has recently released two new documents to help businesses determine their eligibility and navigate false information regarding the ERC:

This document provides a checklist for determining ERC eligibility.

This document outlines some red flags to watch out for when being contacted by questionable sources with claims regarding your ERC eligibility.

How to Identify if You've Chosen a Reputable ERC Partner:

5 Crucial Questions

1.  Has your ERC partner thoroughly understood IRS ERC rules and eligibility requirements?

2.  Does your ERC partner have a proven track record of successfully processing ERC refunds backed by case studies or success stories from satisfied clients?

3.  Is your ERC partner transparent about their fees, charging reasonable upfront costs without requiring excessive contingency fees?

4.  Does your ERC partner have documented processes and a quality control system to ensure accuracy and efficiency in processing ERC claims?

5.  Has your ERC partner regularly updated their qualification guidelines to stay current with changing IRS regulations, showing a commitment to providing accurate and up-to-date assistance to clients?

Want Peace of Mind That You Won't Have To Withdraw Your Claim Or Repay The Refund!

ERC Filing Review is for any business owner uncertain about the validity of their Employee Retention Credit claim.  Our review will reveal any potential red flags in your ERC claim and check for specific documentation needed to demonstrate your ERC eligibility in case of an IRS audit.

Do you have substantial evidence of your business' ERC eligibility?

Businesses may need the following documentation to demonstrate ERC Compliance:

• A detailed calculation of the ERC credit for each employee
• A COVID order timeline and summary of relevant orders
• Documentation to substantiate a 10% "Nominal Impact"
• Detailed employee count analysis

ERC Filing Review: What We Provide

Our expert team of tax credit analysts will conduct a complete examination of your ERC claim, assessing all critical areas for ERC compliance, including:

• A detailed calculation of the ERC credit for each employee
• A COVID order timeline and summary of relevant orders
• Documentation to substantiate a 10% "Nominal Impact"
• Detailed employee count analysis
• Should your claim be viable and require additional supporting documentation, we will work with you to get the other supporting documentation submitted to the IRS.

ERC Compliance Review FAQs