What to do if you filed an employee retention credit claim with the IRS

September 19, 2023 | Authored by RSM US LLP

ARTICLE | September 19, 2023

Authored by RSM US LLP

For more information, please contact Brendan Brady at bbrady@dopkins.com.

The employee retention credit (ERC or ERTC) was originally enacted in the CARES Act in March of 2020 at the onset of the COVID pandemic. Congress acted quickly by enacting this credit to get money in the hands of employers who were continuing to pay employees despite being affected by COVID mitigation measures. Specifically, those effects were a significant decline in gross receipts (which is objective) or a full or partial suspension from government orders (which is very subjective).

Over time, the credit has been changed, and many businesses have been filing. Though the ERC ended for most on Sept. 30, 2021, many businesses continue to file because the statute of limitations is still open. Specifically, the statute for 2020 claims ends April 15, 2024 (taxpayers have another year beyond that for 2021 claims).

Determining eligibility is complex and includes careful analysis and calculation of qualified wages.

The IRS announced an immediate halt to processing ERC claims. Now what?

On Sept. 14, the IRS will discontinue processing claims for the remainder of 2023 in an attempt to limit fraudulent activity in the employee retention credit market. The IRS hopes this measure will reduce the number of fraudulent claims encouraged by third-party providers.

We expect there will be significant delays in processing ERC claims in 2024 when the IRS resumes processing procedures.

The announcement is also significant for those taxpayers who have already filed ERC refund claims but should not have due to ineligibility. Additional procedural guidance from the IRS is expected to allow taxpayers the ability to withdraw claims that have not been processed.

Further, the IRS also intends to provide guidance for those who have received refunds in error, who want to pay them back to avoid penalties and future compliance action.

Understand what options are available for submitted ERC claims

First, and most importantly, employers should work with their trusted tax professional.

The IRS provides some red flags for recognizing some of the aggressive promoters which include:

  • Unsolicited calls or advertisements
  • Statements about it being easy or determinable in minutes
  • Large upfront fees or fees based on the size of the credit

Companies that did engage parties like this should have tax professionals review their substantiation to determine whether it appears to be valid or outside the provided guidance. The IRS published some guidance in July 2023 on supply chain impacts, for example, and in cases where employers were claiming a partial suspension from supply chain impacts, the IRS is expecting to see support of specific government orders and substantiation that suppliers were impacted by those orders. This is only one area of possible impact, but it’s an example of what employers need to be prepared for if the IRS reviews their claim.

You’ve submitted your ERC claim but haven’t received payment. What’s next?

Many employers, even with valid claims, are still waiting for refunds. These entities should expect more delays in processing (even beyond what we were experiencing before) and possibly will receive additional questions from the IRS. In some cases, such entities may be pulled for exam before the IRS issues a refund. The IRS can also commence examination even after the refund is issued.

Also, taxpayers need to be aware that even if a refund is issued, if it is later deemed invalid, the IRS has two years from the date the refund was issued to commence erroneous refund claim action. Erroneous refunds are subject to a 20% penalty.

Recommendations for navigating your ERC claim

The IRS is expected to provide additional guidance for taxpayers about how to withdraw or amend an ERC claim.

If you choose to withdraw your ERC claim or pay back a previously received credit, work with a qualified tax professional to ensure the appropriate steps are taken to protect yourself from potential penalties or interest.

This article was written by Anne Bushman, Alina Solodchikova and originally appeared on 2023-09-19.
2022 RSM US LLP. All rights reserved.

The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

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For more information, contact

Brendan P. Brady CPA, CVA

Brendan is responsible for managing client engagements, team scheduling, training and development. He leads general and specialized audits as well as internal control projects, and is one of the leaders of the Firm’s employee benefit plan audit practice. He uses his experience to offer management advice and suggestions for improving operational efficiency by obtaining a thorough understanding of a business, not just from the controller’s standpoint, but from management’s and the operational side.

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