Employee Retention Credit (ERC) Update

As part of Aprio’s continuing commitment to providing organizations with updated information related to the Employee Retention Credit (ERC,) we wanted to share some recent developments and leading practices to consider.

It is important to note that while the ERC was enacted as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act and amended by subsequent legislation, the enforcement and regulation of ERC was delegated to the Internal Revenue Services (IRS).  Over the course of the past 3 years, the IRS has developed and released an ever-changing series of frequently asked questions detailing their interpretation of the various pieces of legislation, Internal Revenue Code changes and various releases and alerts related to ERC.  As a result, the IRS requirements for eligibility have been clarified in some cases and remains vague in others.  However, Aprio has identified certain leading practices to consider regarding the retention of information to support the ERC position.

Leading practice tips for document retention:

The eligibility for ERC is highly dependent upon an organization’s activities during the COVID period relative to certain factors.  As a result, it is important for your organization to retain original documentation in your files for an indefinite time period in order to substantiate your claim in the event of ERC audit.  Remember that the statute of limitations for examining some ERC claims is five years, and recent legislative proposals could extend that lookback period apply to all ERC filings. With over 3.5M claims filed and limited IRS auditing resources, it is uncertain how many audits will actually be initiated, but it is a best business practice to maintain data as long as possible.  Your organization should consider maintaining pertinent ERC eligibility source data and materials in your files, including such items as:

• Employee level payroll data for 2019 and 2020/2021.
• Detailed sales and receipts/revenue information for 2019 and 2020/2021.
• Signed Forms 941 and 941-X for all quarters of refund and for 2019.
• Copies of proof of mailing/receipt of any amended returns submitted to the IRS pertaining to ERC.
• Copies of federal/state/local government orders related to COVID restrictions that impacted your business operations.
• Details as to the COVID impact on your organization that either led to a partial/total closure of the business or a significant decline in gross receipts.  While this will vary greatly by industry, documents and items such as the following examples may be helpful in the event of IRS audit:
  • In the medical/dental space, monthly patient count for 2019/2020/2021 as well as comparative procedure count.
  • Specific details as to workplace modifications put into place to adhere to social distancing or other requirements, e.g., spacing measures implemented in a manufacturing/distribution setting, significant revenue generating events cancelled, additional time added to space out customers/patients, etc.
  • Internal communications regarding workplace restrictions, closures, etc.
  • Emails or other communications from clients regarding restrictions they put into place that limited your ability to service them as you did pre-COVID.
  • Supply chain impact details specially related to a vendor’s inability to provide you with product due to government orders.

IRS Voluntary Disclosure Programs:

As you may know, there are currently a variety of programs available to taxpayers that wish to withdraw ERC claims that were previously submitted to the Internal Revenue Service.  The IRS has previously alerted Taxpayers to issues it has encountered with respect to “bad actors” in the ERC provider space and has designed these programs to allow employers that have uncertain ERC eligibility positions, particularly if they utilized a “credit mill” or another unsavory provider, to come forward and withdraw a prior claim submitted.

It is also important to note that, even with the best intentions, some organizations may still question whether the ERC claim they filed was appropriate, especially taking into account the developing IRS position on eligibility.  An updated review may provide comfort as to the position taken, or may identify a lack of meeting eligibility criteria.  The available programs differ based upon a taxpayer’s claim status and are briefly detailed below.  Aprio can provide specific details on each if requested:

Withdraw a filed claim that has either not been paid or for which a refund check has been received and not cashed:

• The main takeaway: On October 19, 2023, the IRS announced a program that will allow certain businesses that incorrectly filed for an ERC refund to withdraw their claims without penalty.
•  IRS statement on the VDA – As part of a larger effort to protect small businesses and organizations from scams, the Internal Revenue Service today announced the details of a special withdrawal process to help those who filed an Employee Retention Credit (ERC) claim and are concerned about its accuracy.
• Impact on your business: In the event you filed for ERC and the claim is a) still pending b) you have received but not cashed the refund check or c) you are under IRS audit for the ERC claim, provided your business did not file fraudulently, you can withdraw the claim without penalty and with no future audit risk.
• Withdrawal steps: The withdrawal process provides for a simple correction filed with the IRS, the return of an uncashed check (if applicable), and with no penalty applied for an incorrect filing.
• Deadline to file: None specified.

Rescind an ERC claim and return refunds previously received:

• The main takeaway: On December 21, 2023, the IRS announced a voluntary disclosure program which would allow businesses that incorrectly filed for and received an ERC refund to return 80% of the previously received amounts with no interest and penalties.
• IRS statement on the VDA – The new disclosure program, which has been in the works for several months, is part of a larger effort at the IRS to stop aggressive marketing around ERC that misled some employers into filing claims.
• Impact on your business: In the event you filed for ERC and now believe that your organization did not qualify, you can return 80% of the amount received without penalty and with no future audit risk.
• Next steps: The IRS has provided specific next steps to take dependent upon your specific fact pattern.
• Deadline to file: March 22, 2024

In addition to these programs, on January 31, 2024, the U.S. House of Representatives passed H.R. 7024 that would a) terminate the ERC program to all NEW claims effective as of that date, and b) extend the statute of limitations for individual refund audit to six years from the date of submission.  This bill has not advanced through the Senate at this time, and passage is uncertain.

Finally, the IRS currently has a moratorium in place for their processing and payment of ERC claims filed after September 13, 2023.  The IRS notes that this is designed as a temporary measure to clear out the backlog of open claims, and there is no clear timeline as to when claims filed after this period will be reviewed and, where appropriate, refunded to taxpayers.

If you would like to discuss any of these topics with a tax professional at Aprio, please contact us at ERC2024@Aprio.com.