The Internal Revenue Service (IRS) has recently unveiled a voluntary disclosure program for employers who mistakenly claimed the Employee Retention Credit (ERC). The ERC, a refundable tax credit, was designed to aid businesses that faced hardships due to closures and event cancellations mandated by state and local governments during the pandemic.
Understanding The Issue
Despite the noble intent behind the ERC, numerous employers who were ineligible for the credit applied for and received funds. This was partly due to misinformation provided by scammers. As a result, the IRS initiated a disclosure program to rectify these erroneous claims, which is open for participation until March 22nd, 2024.
Consequences Of Erroneous Claims
Employers who erroneously claimed the ERC face multiple repercussions, ranging from financial penalties to potential criminal investigations. If the funds have not been received, employers can withdraw their ERC claim, essentially nullifying the claim. Completing the voluntary disclosure paperwork and returning 80% of the total credit is necessary for those who have already received the funds.
However, failure to rectify these claims may lead to audits by the IRS and subsequent demands for the full refund of the credit, along with interest and potential penalties. In cases of fraud, employers could even face criminal investigations and prosecution for submitting false tax claims to the IRS.
Eligibility Criteria For The ERC
To qualify for the ERC, a business must meet one of the following criteria:
- Sustained a full or partial suspension of operations due to a government order limiting commerce, travel, or group meetings because of COVID-19 during 2020 or the first three quarters of 2021
- Experienced a significant decline in gross revenue during 2020 or a decrease in gross revenue during the first three quarters of 2021
- Qualified as a recovery startup business for the third or fourth quarters of 2021
In addition, certain agencies, such as government agencies and employers that faced supply chain disruptions but did not experience a government-ordered suspension of operations, are not eligible for the credit.
Challenges And Confusion
Determining eligibility for the ERC can be challenging for employers, particularly in assessing the significance of revenue downturns or operational slowdowns. The complexity of this criteria has led to confusion among employers, with many unsure if they were rightfully entitled to the credit.
The situation has been worsened by aggressive marketing tactics employed by some firms, which encouraged businesses to apply for credit even if they were not eligible. Employers were enticed with promises of substantial funds, often at the request of marketers who stood to gain a percentage of the claimed tax credit.
Recommendations And Guidance
Given the complexities and potential pitfalls associated with the ERC, it’s crucial for employers to seek guidance from trusted tax advisors. Advisors who do not stand to benefit from the credit can offer unbiased counsel, helping employers navigate eligibility requirements and make informed decisions.
In light of the IRS’ voluntary disclosure program, employers are urged to take a close look at their ERC submissions and reassess their eligibility with the assistance of legal, accounting, and HR professionals. This presents a limited window of opportunity for employers to rectify any erroneous claims and avoid potential repercussions.
In addition, it’s essential for employers to be aware that wages reported as payroll costs for the Paycheck Protection Program (PPP) loan forgiveness cannot be used to claim the ERC. The PPP, established by the CARES Act, provides small businesses with funds to pay up to eight weeks of payroll costs, including benefits. Funds can also be used to pay interest on mortgages, rent, and utilities.
Looking For Assistance?
The IRS’ new voluntary disclosure program offers employers an opportunity to rectify erroneous ERC claims and avoid potential legal and financial consequences. By seeking expert guidance and carefully reassessing their eligibility, employers can navigate this complex landscape with confidence and integrity. Not sure where to start? GMS, a certified professional employer organization (CPEO), provides business owners with valuable assistance and guidance. The following are several ways GMS can support businesses through this process:
- Expert guidance on eligibility: GMS can provide expert advice on the eligibility criteria for the ERC, helping businesses assess their qualifications for the credit based on the specific requirements outlined by the IRS.
- Compliance support: GMS is equipped to ensure that businesses comply with the ERC's stringent guidelines. They can help employers navigate the complex compliance landscape, minimizing the risk of errors and ensuring adherence to the program’s terms.
- Strategic advisory services: GMS can offer strategic advisory services, guiding employers on the best course of action regarding their ERC claims and voluntary disclosure.