Clarifying Misconceptions about Tax Relief: A Guide for Small Businesses and the Employee Retention Credit

The wake of the pandemic saw many businesses mistakenly claim tax relief benefits, largely due to misinformation, according to National Taxpayer Advocate, Erin Collins. This specifically pertains to the Employee Retention Credit (ERC), a measure introduced to help small businesses during the COVID-19 crisis.

The ERC provides up to $5,000 per employee for 2020 or $28,000 per employee for 2021, and there’s still time to amend returns and claim this credit. However, the complexity of the relief scheme has led to an influx of firms falsely asserting businesses’ eligibility.

“Unfortunately, individuals have been misguided,” stated Erin Collins at the recent annual conference of the American Institute of Certified Public Accountants. This has led to some businesses erroneously claiming and even receiving refunds.

The IRS has been vocal in cautioning against ‘third parties’ promoting the ERC and even featured the issue in its 2023 Dirty Dozen list of tax scams. Recent data reveals that over 866,000 companies have successfully claimed ERCs, totaling over $152.6 billion.

However, the IRS now faces a backlog of Form 941-Xs, which businesses must submit to amend returns and claim the ERC. As of mid-June, about 537,000 forms remained unprocessed.

Collins asserts that the IRS is formulating guidance for those who might have inaccurately claimed the credit. She urged businesses that realize they are ineligible to act promptly and rectify the situation.

Rosemary Sereti, managing director of Deloitte Tax and former IRS senior executive, also emphasized the importance of businesses taking the initiative to correct ERC-related mistakes.

Of the backlog, Collins noted that many are “legitimate claims” awaiting IRS examination. The IRS has allocated trained staff at two locations to process the backlog and examine potential Covid-19 credits.

Businesses that have inaccurately claimed the ERC may face penalties, warns Debra Estrem, managing director of private wealth controversy at Deloitte Tax, and former IRS Office of the Chief Counsel employee. The specific penalty depends on whether the error was on the original or amended return and can generally amount to 20% of the excessively claimed amount.