ERC Updates: Is Your Business at Risk for Improper Claims?
The Employee Retention Credit (ERC) was introduced as a financial lifeline to help businesses weather the economic challenges brought on by the pandemic. However, as businesses rushed to claim ERC, many inadvertently made errors in determining eligibility, resulting in improper claims. With recent ERC updates, the IRS is stepping up its efforts to review and recover these credits, making it essential for businesses to be aware of potential pitfalls, the current review process, and how to get back into compliance.
Why Are ERC Claims Facing Increased Scrutiny?
Many businesses and their advisors miscalculated their eligibility for the ERC, often due to confusing guidelines and the evolving nature of the program. Incorrect eligibility computations can lead to serious financial consequences if not addressed promptly.
Recently, the IRS has introduced programs to address improperly claimed credits, offering businesses a chance to repay a portion of their claims and avoid penalties, but these options require careful consideration.
One of the primary reasons for these errors is a lack of clarity on which businesses qualify, especially concerning which periods and under what circumstances eligibility applies. This confusion has been compounded by the aggressive marketing tactics of some third-party advisors who guaranteed results without a thorough understanding of the rules.
IRS Actions and Compliance Challenges
The IRS has introduced a series of initiatives to identify and recover improperly claimed ERC amounts:
1. 80 Percent ERC Payback Scheme
Under the 80 percent payback program, businesses that recognize their claim was incorrect can voluntarily return 80% of the credit while keeping 20% tax-free. This program also allows businesses to retain any interest paid by the IRS, although the interest itself is taxable .
• The IRS has set strict deadlines and requirements for businesses wishing to participate, making it critical for those affected to act swiftly. The deadline for requesting this adjustment is March 22, 2024, and businesses must sign and return a closing agreement within ten days of receiving it .
2. The 85 Percent Payback Program for 2021 Claims
In addition to the initial program, the IRS has launched a second initiative for 2021 ERC claims, where businesses can pay back 85% of their improperly claimed credit while keeping 15% tax-free.
• The eligibility requirements for this program are stringent. Businesses cannot be under IRS criminal investigation or employment tax examination for 2021, and applications must be submitted before the November 22, 2024, deadline .
3. Legislative Impact: H.R. 7024
Pending legislation, H.R. 7024, could have a significant impact on how ERC claims are treated, including an increase in penalties for ERC promoters and an extension of the statute of limitations on these claims to six years . This change would give the IRS more time to assess and potentially recover improper claims, increasing the risk for businesses that may have incorrectly filed.
4. Processing Delays and IRS Backlog
The IRS is currently dealing with an extensive backlog of ERC claims, with approximately 1.4 million unprocessed as of September 2024. While some businesses are starting to receive payments, many others remain in limbo. The IRS has also begun issuing disallowance letters, which could contain errors, further complicating matters for businesses awaiting refunds .
What Could Go Wrong with Your ERC Claim?
Incorrect ERC claims can arise for various reasons, including:
• Misinterpretation of Eligibility Criteria: Many businesses misinterpreted the eligibility requirements, especially regarding revenue decline thresholds or qualifying impacts on operations. This led to claims being filed for periods that did not qualify.
• Over-Reliance on Third Parties: Some businesses worked with advisors who guaranteed ERC refunds without a proper evaluation of eligibility. The IRS now requires businesses to disclose these advisors’ details when participating in voluntary disclosure programs, which could expose both the business and the advisor to further scrutiny .
How Hudson & Empire Can Help You Come Back into Compliance
If you suspect that your ERC claim might have been improperly calculated, it is essential to take proactive steps before the IRS initiates action against you. At Hudson & Empire, we provide tailored support to help businesses navigate the complex ERC landscape:
• ERC Claim Review and Audit Preparation: We conduct a thorough review of your previously filed ERC claims to ensure compliance with the latest IRS guidelines. This includes identifying potential errors and determining the best course of action to rectify them.
• Voluntary Disclosure Assistance: If your business needs to participate in one of the IRS’s voluntary payback programs, we can assist you through the application process, ensuring that you meet all the requirements and deadlines.
• Representation and Risk Mitigation: In cases where the IRS has already begun an examination, Hudson & Empire offers professional representation to mitigate the risk of penalties and fines. Our team will work to negotiate the best possible outcome for your business.
Stay Ahead of Potential Issues
The IRS’s evolving approach to ERC compliance underscores the importance of proactive management. Delays in processing and the risk of disallowance mean that many businesses could be left in uncertainty for months, if not years. With Hudson & Empire by your side, you can navigate these uncertainties confidently, knowing that you have a knowledgeable partner to help you stay compliant and minimize financial risk.
Contact Hudson & Empire today to schedule a consultation and ensure your ERC claims are managed correctly, protecting your business from unexpected liabilities.
What is the Employee Retention Credit (ERC), and why is it important for businesses?
The ERC is a refundable tax credit designed to support businesses that retained employees during the COVID-19 pandemic. It helps offset payroll expenses, providing financial relief. However, with the latest ERC updates, businesses must ensure compliance to avoid potential penalties from improper claims.
What common errors are businesses making when claiming the ERC?
Many businesses misinterpret eligibility criteria, such as revenue decline thresholds or the impact of PPP loans on ERC. Other errors include incorrect calculation of qualified wages. These mistakes can lead to improper claims, increasing the risk of IRS audits and penalties.
How are ERC updates affecting the IRS review process?
Recent ERC updates have prompted the IRS to intensify its review process. The IRS is now closely examining ERC claims to identify and recover funds from ineligible claims, making it critical for businesses to reassess their filings for accuracy and compliance.
What steps can a business take to correct an improper ERC claim?
If a business realizes it made an improper claim, it should consult with a tax professional to file an amended return or communicate with the IRS about repayment. Acting promptly can help mitigate potential penalties and maintain compliance.
How can businesses stay informed on ERC updates to avoid future compliance issues?
Businesses should regularly monitor IRS announcements, seek guidance from tax professionals, and implement internal reviews of their ERC claims to ensure they adhere to the latest ERC updates and remain compliant.
What are the consequences of filing an improper ERC claim?
Filing an improper ERC claim can lead to significant consequences, including penalties, interest on the amount improperly claimed, and potential IRS audits. In severe cases, businesses may also face legal action. Staying informed on ERC updates and ensuring compliance can help avoid these costly repercussions and protect the business’s financial health.
