The Internal Revenue Service recently published IR-2022-183 warning employers to take caution against third parties that are encouraging them to claim the Employee Retention Credit even if they may not qualify. The IRS has given multiple warning signs to look out for. These ERC mills continue to be aggressive in their tactics so the IRS has directed CPAs and taxpayers to form 3949-A which can be used to file a report on tax-related illegal activity related to false ERC claims.
While the IRS ramps up its efforts to start auditing ERC claims, here is a list of some activities we have noticed:
- They are considering a “voluntary disclosure” program for those who think they may have been targeted by an ERC mill and have erroneously filed for ERC credits. This could relieve taxpayers of potential fines and penalties.
- They have dedicated 300 agents to focus on ERC claims that have all been through an intensive training program.
- They have yet to publish any insight into their process for picking which claims to audit. However, it is safe to assume that more significant claims will be first. Make sure to maintain any documentation for ERC claims you have filed. We expect there to be heavy scrutiny of government shutdown claims filed for industries outside of those most affected by the COVID shutdown like restaurants, hospitality, retail, etc.
- A specific issue related to IRS audits is the discrepancy in the IRS statute of limitations for auditing ERC, which is 5 years, compared to the statute of limitations for amending business tax returns, which is 3 years. The IRS requires tax return wage deductions in the year associated with the ERC claim to be reduced to avoid getting a double benefit. This means that taxpayers claiming ERC for a 2020 period will need to amend the corresponding 2020 tax return to make this adjustment and either adjust NOL carryforwards or pay the additional tax resulting from this adjustment. As of right now, 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 the lost deductions. It will be several years before this has any impact, so the IRS may establish a process by the time it becomes an issue.
Although this may feel intimidating, National Tax Group is committed to working with clients who have legitimate cases for ERC claims. ERC mills are aggressive with their marketing tactics and often use mass marketing tools to reach their victims. If you think you have a case for an ERC claim, seek a referral from your CPA for a reputable firm. If you have questions or want to explore more information on our tax services, please contact us today.