IRS is contemplating steering on worker retention tax credit score

Erin M. Collins, Attorney for National Taxpayers.

Source: IRS

After a spate of pandemic-era corporate statements with a tax credit, the IRS is weighing guidance for those who wrongly claimed the tax break.

The employee retention loan was created to support small businesses during the Covid-19 pandemic. There is still time to amend tax returns and claim the credit, which is up to $5,000 per employee in 2020 or $28,000 per employee in 2021.

Experts say the opportunity has sparked a wave of specialty firms falsely promising entrepreneurs they would qualify for the complicated tax break.

“I really think people were fooled,” said Erin Collins, advocate for national taxpayers, at this month’s annual conference of the American Institute of Certified Public Accountants. People have claimed the credit and may have already received a refund, she added.

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The IRS warned business owners in October about “third parties” promoting the employee retention credit, and recently renewed its warning by adding the issue to its annual 2023 list of Dirty Dozen tax fraud cases.

As of March 3, just over 866,000 companies have claimed and received employee retention credits totaling over $152.6 billion, according to the latest IRS databook.

IRS is working on ERC credit standards

There is currently a backlog of Forms 941-X, known as the Employer’s Adjusted Quarterly Federal Tax Return, that businesses must use to amend their tax returns in order to claim the 2020 or 2021 employee retention credit. As of June 14, approximately 537,000 forms were unprocessed 941-Xs, according to the IRS.

Collins said the IRS is working on guidance for claimants who may have incorrectly claimed the credit.

“I think now there’s a little bit of regret from buyers,” she told CNBC in early June, noting that ineligible claimants should start thinking about “ways to reverse this” if they find that they are not qualified.

The most important thing is to get to the front first.

Rosemary Sereti

Managing Director of Deloitte Tax

“The most important thing is to come forward first,” said Rosemary Sereti, chief executive of Deloitte Tax and a former executive of the IRS, when speaking to CNBC about employee retention credit errors. “Once [the IRS] come to you, it’s a little late.

Of course, the current Form 941-X backlog also includes many “valid claims” for the employee retention credit that have been delayed as the IRS reviews the filings, Collins said. The IRS website says the agency is working in two locations with “trained staff” on inventory to check possible Covid-19 credits.

Potential IRS penalty for falsely claiming ERC

If you claimed the retention credit in error, you could face an IRS penalty, said Debra Estrem, director of personal property disputes at Deloitte Tax, who also worked in the IRS chief counsel’s office.

She said you may face an “erroneous claim for a refund or credit penalty,” which is typically 20% of the amount overpaid. However, the type of penalty depends on whether the error occurred on the original filing or on an amended tax return.