The IRS’s employee retention credit (ERC), created during the COVID-19 pandemic, seemed to offer a lucrative opportunity for many employers. That is certainly the impression that the many promoters that sprung up in response presented. But the IRS has discovered that a large percentage of the claims are invalid. Here is what you need to know if your law firm made a claim.
ERC’s checkered history
The ERC is a refundable tax credit targeted at businesses that 1) continued paying their employees when they were shut down due to the pandemic in 2020 or 2021, or 2) suffered significant drops in gross receipts from March 13, 2020, to December 31, 2021. The maximum per-employee credit was $5,000 for 2020 and $7,000 per quarter for the first three quarters of 2021 — a total of $26,000 for each retained employee.
The requirements for the credit are strict, though, something that promoters often downplayed. As a result, many claimants are at risk of liability for repayment, penalties and interest, as well as a domino-effect of other tax problems.
Recently, the agency looked at over a million ERC claims representing more than $86 million. It found that 10% to 20% of the claims showed clear signs of being erroneous, and another 60% to 70% demonstrated an unacceptable level of risk. The agency announced that tens of thousands of the erroneous claims would be denied, and those with an unacceptable risk would undergo further analysis.
In addition, the IRS’s review of 2020 claims revealed more than 22,000 improper claims, leading to $572 million in assessments against employers. The numbers could skyrocket when the agency reviews 2021 claims, as the maximum amount that year was $21,000.
Next steps for employers
Over a million ERC claims remain unprocessed as the IRS closely scrutinizes them. Not surprisingly, some law firms that were confident in the legitimacy of their claims when filed may now be less certain. For employers that overclaimed the ERC and now want to amend or correct the amount, they can take advantage of the ERC Withdrawal Program. It is available to eligible employers that filed a claim but have not received, cashed or deposited a refund. Your firm is eligible if it:
- Made the claim on an adjusted employment tax return (IRS Forms 941-X, 943-X, 944-X, CT-1X);
- Filed the adjusted return solely to claim the ERC, with no other adjustment; and
- Seeks to withdraw the entire amount of your ERC claim.
The IRS will treat withdrawn claims as if they had never been filed, and no interest or penalties will apply.
Don’t go it alone
In virtually all its announcements and statements regarding ERC issues, the IRS has urged taxpayers to work with trusted tax professionals who understand the complex rules. We can help your firm review your claims and choose next steps.
For more information, contact Michael Loesevitz at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Law Firm Group.