The employee retention credit (ERC) has been fraught with challenges since its enactment during a rapid series of COVID-19 relief legislative packages in early 2020. Legislative changes to the ERC in 2020 and 2021, along with varying opinions regarding ERC qualifications, has created confusion for both taxpayers and the IRS. Since the mechanism for requesting an ERC refund is on the Form 941 Payroll Tax Return, taxpayers were able to submit a claim for refund until the statute of limitation for amending the Form 941 has elapsed. This statue of limitations is potentially accelerated to January 31, 2024 if the bipartisan tax package (Tax Relief for American Families and Workers Act of 2024) becomes law.
The IRS issued several warnings throughout 2023 about a very high volume of fraudulent and improper ERC claims, and on Sept. 14, 2023, they announced an unprecedented pause on processing ERC claims. The IRS says the moratorium on processing new claims will continue until late spring 2024. Shortly after the moratorium on processing began, the IRS offered a special withdrawal process for employers who wish to stop processing of an ERC claim that they haven’t received a refund for yet. This withdrawal procedure remains applicable in 2024.
In December 2023, the IRS announced the voluntary disclosure and settlement program (VDP), available to taxpayers wanting to return invalid refunds. During the three-month VDP window, employers reported more than $225 million of invalid ERC claims. This program was suspended after March 22, 2024. The IRS has communicated that they may reopen the VDP program on a future date, depending if Congress passes the Tax Relief for American Families and Workers Act of 2024.
The IRS continues to expand the number of IRS examinations of ERC. Our tax credit and tax controversy specialists can assist if you already filed an ERC claim and need to verify your ERC credit calculation, need to check your ERC exposure during M&A planning, need to consider amending income tax returns, or need support in an IRS exam. All taxpayers who claimed ERC should consider an assessment from a trusted tax professional who has experience evaluating ERC eligibility, calculating the credit, and defending IRS audits.
