Navigating the Employee Retention Credit (ERC) Minefield

In 2020, as a part of the CARES Act, the U.S. government introduced the Employee Retention Credit (ERC), a vital tax relief measure to counter the economic impact of the COVID-19 pandemic. Aimed at supporting businesses that kept paying their employees during this challenging period, the ERC offered a refundable tax credit on wages paid between March 12, 2020, and January 1, 2022. Businesses were eligible to claim this credit on their quarterly employment tax returns, providing much-needed financial relief during a time of unprecedented hardship.

However, the well-intentioned ERC soon became a target for abuse. Misled often by aggressive marketing tactics, some businesses filed claims without fully meeting the eligibility criteria, leading to a substantial number of improper claims. Recognizing this issue, the IRS implemented a moratorium on processing new ERC claims from September 14, 2023, allowing them time to conduct thorough compliance reviews and protect legitimate businesses from the consequences of fraudulent claims.

The IRS’s response didn’t stop there. More than 20,000 letters have been sent out to notify taxpayers of disallowed ERC claims, focusing particularly on entities that either didn’t exist or lacked paid employees during the eligibility period. This action is part of a larger effort to maintain the integrity of the ERC and includes programs like special withdrawal options for pending claims and a voluntary disclosure program for those who wish to rectify their situation and avoid future IRS action.

Amidst this intensified scrutiny, many taxpayers and business owners find themselves overwhelmed and uncertain. This is where Propono steps in, offering expert tax resolution and representation services. Our team is well-versed in the complexities of the ERC and is ready to assist you, whether you’re disputing a claim, seeking guidance on compliance, or facing an audit.

If you’ve inadvertently filed an inaccurate ERC claim or are unsure about your claim’s accuracy, it’s crucial to take proactive steps. Propono can assist you in reviewing your situation and, if necessary, in withdrawing your claim before it’s processed by the IRS. This proactive step can prevent future repayments, interest, and penalties, offering a vital lifeline for businesses that may have been misled into filing ineligible claims.

For example,  ABC Tech, a small software development company, faced significant financial challenges during the COVID-19 pandemic. With a reduction in client contracts and revenue, the company looked for ways to support its workforce. ABC Tech’s owner heard about the Employee Retention Credit and believed it could provide the needed relief.  In 2021, ABC Tech filed for the ERC, claiming a credit of $50,000. The claim was based on the wages paid to its ten employees during the pandemic. The company included this credit in its quarterly employment tax return, expecting a refund from the IRS.

However, upon review, the IRS denied the ERC claim made by ABC Tech. The IRS investigation found that although ABC Tech did experience a decrease in business, it did not meet the required threshold of a “significant decline in gross receipts” as outlined in the ERC guidelines. Additionally, the IRS discovered that ABC Tech had received a Paycheck Protection Program (PPP) loan and used it to cover the same payroll costs for which they claimed the ERC. Since double-dipping into both relief programs for the same expenses was not permitted, ABC Tech’s ERC claim was deemed ineligible.

As a result of the denial, ABC Tech was required to repay the $50,000 credit it had claimed, along with potential penalties and interest. The company also faced additional scrutiny from the IRS for future tax filings.

This example highlights the importance of understanding the specific requirements and guidelines of the ERC program and ensuring that all criteria are met before making a claim. It also underscores the need for accurate record-keeping and possibly seeking advice from a tax professional when navigating these complex tax relief programs.

The landscape of ERC claims has become more challenging than ever, but with Propono’s guidance and representation, you can navigate these challenges confidently. We’re here to ensure that your business’s financial health is safeguarded and that your tax obligations are managed successfully.

For anyone navigating these turbulent waters, remember: the right advice and representation are key to staying compliant and managing your tax obligations effectively. Trust in Propono’s expertise to guide you through these complex times. Contact us today for expert assistance with your ERC and other tax-related concerns.