One of the several COVID relief provisions Congress enacted is the Employee Retention Credit (“ERC”).  See I.R.C. § 3134.  The ERC was enacted as part of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES” Act).  The ERC is a refundable tax credit designed for businesses who continued paying employees during the COVID-19 pandemic.  To qualify as an “eligible employer,” the employer must have had either (1) a “significant decline” in gross receipts between March 13, 2020, and December 31, 2021, or (2) its business operations “fully or partially suspended due to orders from an appropriate governmental authority.”  In IRS Notice 2021-20, the IRS provided detailed rules related to these two ways employers can qualify for the ERC.

Eligible employers can claim the ERC on an original Form 941 or Form 941X amended employment tax return.  The effect of the credit can be substantial.  With the ERC, businesses can claim up to a total of $26,000 per employee in refundable credits.  For employers with many employees, claiming the ERC can result in tax refunds exceeding hundreds of thousands of dollars.

Given the large potential ERC refund amounts, numerous firms have been promoting the ERC.  In addition, new firms have been created solely to encourage and advise businesses to file ERC claims.  These firms are charging high fees for filing ERC-based refund claims, with many charging a contingency fee based on the amount they calculate that employers can receive from the credit.  However, these firms may be promoting and claiming the ERC for businesses that do not meet the rules and requirements to qualify.  In some cases, these firms may be promoting the ERC for a full or partial suspension of business operations based on vaguely defined “supply chain issues” or CDC or national guidance that does not qualify for a full or partial suspension.  The IRS is aware of the potential fraud taking place in the ERC arena and has warned employers to be cautious of such schemes.

The IRS has started audits of Form 941 employment tax returns for the ERC.  The IRS has started referring amended employment tax returns with significant employer credit claims to IRS Examination for audit.  Additionally, the IRS is training 300 revenue agents on how to examine the credit.  In fact, the IRS has already sent employers detailed requests for lists of employees and proof of eligibility.

Regardless of what was promised by the ERC promotor, the IRS has reminded Taxpayers that they are “always responsible for the information reported on their tax returns. Improperly claiming the ERC could result in taxpayers being required to repay the credit along with penalties and interest.”  However, if a taxpayer files an amended return before being contacted by the IRS, the taxpayer may be able to avoid certain penalties.  This rule applies to Form 941X amended employment tax returns as well.

Did your business claim the ERC?  Are you concerned that your business might not qualify for the full ERC or qualify at all?  Would you like guidance from former IRS attorneys on whether your business qualifies for the ERC?  Have you been contacted by the IRS about the ERC and an IRS audit (for example, on an IRS Letter 566 or Letter 2205)?  Contact our former IRS attorneys to discuss your situation and determine the best plan going forward.

Holtz, Slavett & Drabkin, APLC is a tax controversy and tax litigation law firm consisting of former IRS attorneys.  We represent taxpayers in all aspects of tax disputes with the IRS and state tax authorities, including sensitive IRS audits and audits involving the Employee Retention Credit (ERC).  To schedule a consultation, please contact us at (310) 550-6200 or (949) 999-6606.