The Employee Retention Credit (ERC) is a valuable tax credit for companies that have been impacted by the COVID-19 pandemic. It can help companies offset the costs of retaining their employees during difficult times, but it's important for companies to be careful about trusting organizations that claim they can help them obtain the credit if they previously thought they did not qualify.
Recently, the IRS published IR-2022-183, warning employers to be wary of third parties who are advising them to claim the ERC when they may not qualify. The IRS included several red flags that business owners and CPAs should look out for, many of which have been highlighted in previous articles featured in Accounting Today.
One of the red flags that the IRS pointed out is ERC mills, which are organizations that aggressively market these positions and may not have the best interest of the company in mind.
As the IRS continues to crack down on potential fraud related to the Employee Retention Credit (ERC), it is crucial for employers to be cautious when considering claims for this credit. In a recent notice, the IRS warned employers to be wary of third parties advising them to claim the ERC when they may not qualify, and included several red flags to look out for.
The IRS has stated that they now have 300 agents who have undergone a training program specifically focusing on ERC claims. Additionally, they are considering a "voluntary disclosure" program for taxpayers who were targeted by ERC mills and mistakenly claimed credits. This may help to relieve these taxpayers of penalties and interest.
It is important for employers to understand that documentation is crucial for any ERC claim. The IRS is likely to focus on larger claims initially, and additional scrutiny may be given to claims for government shutdowns outside of the industries most affected by COVID-19 shutdowns, such as restaurants and hospitality.
One specific issue related to IRS audits is the discrepancy in the statute of limitations for auditing ERC (5 years) compared to the statute of limitations for amending business tax returns (3 years). This means that in the event of an IRS disallowance of an ERC claim in year 4 or 5 of the IRS audit statute, a taxpayer may have to pay back the credits and not have the opportunity to amend tax returns to reclaim lost deductions.
It is important to note that while there is a significant amount of fraud in this area, there are still legitimate cases for ERC claims. Business owners should be wary of credit companies using mass marketing techniques to contact them.
In conclusion, now is the time for employers to reexamine their ERC claims and proceed with caution when filing any new claims. Business owners should ensure that they have sufficient documentation to support their eligibility for the credit and work with reputable tax professionals to avoid potential penalties and fraud. It is important to understand that the IRS is increasing focus on ERC claims and being proactive in identifying fraud.