Numerous businesses are coming under fire for receiving an Employee Retention Tax Credit (ERTC) through an invalid application. Yet many of them were under the assumption that they did indeed qualify at the time of applying.
415 Group director Todd Ruggles, CPA, explains why so many businesses were led astray and how they can rectify the matter.
Recent IRS warnings and announcements regarding the Employee Retention Tax Credit (ERTC) have raised some businesses' concerns for about the validity of their claims for this valuable, but complex, pandemic-related credit — and the potential consequences of an invalid claim.
In response, the IRS has rolled out a new process that certain employers can use to withdraw their claims.
Fraudsters jump on the ERTC
The ERTC is a refundable tax credit intended for businesses that 1) continued paying employees while they were shut down due to the pandemic in 2020 and 2021, or 2) suffered significant declines in gross receipts from March 13, 2020, to December 31, 2021. Eligible employers can file claims until April 15, 2025 (on amended returns) and receive credits worth up to $26,000 per retained employee.
With such potentially large payouts, fraudulent promoters and marketers were quick to rush in with offers to help businesses file claims in exchange for fees in the thousands of dollars or for a percentage of any refunds received. The requirements for the credit are strict, though, and the IRS has found that many of these claims fall short of meeting them.
Invalid claims put taxpayers at risk of liability for credit repayment, penalties and interest, in addition to the promoter’s fees. And promoters may leave out key details, which could lead to what the IRS describes as a “domino effect of tax problems” for unsuspecting employers.
The IRS responds
The wave of fraudulent claims has produced escalating action from the IRS. In July 2023, the agency announced that it was shifting its ERTC review focus to compliance concerns, with intensified audits and criminal investigations of both promoters and businesses filing suspect claims. Two months later, it imposed a moratorium on the processing of new ERTC claims.
The moratorium, prompted by “a flood of ineligible claims,” will last until at least the end of 2023. The processing of legitimate claims filed before September 14 will continue during the moratorium period but at a much slower pace. The IRS has extended the standard processing goal of 90 days to 180 days and potentially far longer for claims flagged for further review or audit.
According to the IRS, though, the moratorium isn’t deterring the scammers. It reports they’ve already revised their pitches, pushing employers that submit ERTC claims to take out costly upfront loans in anticipation of delayed refunds.
Now, the IRS has unveiled a new withdrawal option for eligible employers that filed claims but haven’t yet received, cashed, or deposited refunds. Withdrawn claims will be treated as if they were never filed, so taxpayers need not fear repayment, penalties, or interest. (The IRS also is developing assistance for employers that were misled into claiming the ERTC and have already received payment.)
The withdrawal option is available if you:
- Claimed the credit on an adjusted employment return (for example, Form 941-X),
- Filed the adjusted return solely to claim the credit, and
- Requested to withdraw your entire ERTC claim.
The exact steps vary depending on your circumstances, including whether you filed your claim yourself or through a payroll provider, have been notified that you’re under audit, or have received a refund check that you haven’t cashed or deposited. Regardless of the applicable procedure, your withdrawal isn’t effective until you receive an acceptance letter from the IRS.
Taxpayers that aren’t eligible for the withdrawal process can reduce or eliminate their ERTC claim by filing an amended return. But you may need to amend your income tax return even if your claim is withdrawn.
Seek help from 415 Group
Throughout its warnings about potential ERTC pitfalls, the IRS has continued to urge taxpayers to consult “trusted tax professionals.” If you’re having second thoughts about your ERTC claim, we can help you review your claim and, if appropriate, properly determine the allowable credit or withdraw it.
Contact 415 Group today to discuss your options.
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For a lot of businesses who applied for the Employee Retention Tax Credit, they may have applied without being fully aware of all the requirements needed for a complete and accurate application. Many third-party providers reached out to businesses saying they qualified, when in fact they didn’t, or the providers didn’t have the experience to correctly file for them.
The IRS became increasingly aware of this and is offering the ability to withdraw unprocessed claims that don’t qualify. Then, if the business does in fact qualify, they can re-file with the appropriate information while the statutes for those periods remain open.
However, many businesses are unfortunately learning that they never qualified in the first place as more guidance has come from the IRS. Certain third-party providers may have charged taxpayers for calculating the credits without providing the required documentation and support to justify the refunds received
If the ERTC application is reviewed by the IRS and found to be insufficient, a business will likely have to pay back the tax credit itself. They may also be subject to interest and penalties. The repercussions can start to stack up and become overwhelming.
The ERTC is one of the newer areas in the tax code without substantial guidance, so it can be difficult to tell if you legitimately qualify, especially if a taxpayer is filing under the suspension of business operations test. It’s wise to work with a trusted advisor to get a second opinion if you’ve already applied. They will be able to work with you on potential qualification and advise on next steps.
At 415 Group, we help our clients to have a good perspective on whether or not they qualify for ERTC and other credits. We want them to be able to make the determination up front as to whether or not they qualify. Even though the moratorium (explained in the main article below) has yet to be lifted, we are assisting those with valid claims to ensure they receive the credit. If they do, we then guide them through the application process. Furthermore, we can assist with the withdrawal process.
Even though there is a lot of controversy surrounding the ERTC, legitimate claims should still be pursued. It’s important that if you’re claiming a credit now or in the future, you have the right team behind you with the right documentation to support your claim.
If you’re wondering if your business qualifies for the Employee Retention Tax Credit or you have questions on withdrawing your claim and potentially reapplying, reach out to 415 Group today.