The Employee Retention Credit (ERC) is a tax credit designed to support businesses and tax-exempt organizations affected by the COVID-19 pandemic. Eligible employers, who paid qualified wages between March 12, 2020, and January 1, 2022, may claim this refundable tax credit. The credit amount varies based on factors such as government-ordered shutdowns, declines in gross receipts, or qualification as a recovery startup business.
ERC Tax Credit
For instance, businesses that were shut down or experienced the required decline in gross receipts during specific periods in 2020 and 2021 are generally eligible. To claim the ERC, eligible employers can use adjusted employment tax returns, such as Form 941-X for quarterly filers, with the credit applicable to various tax periods.
The IRS has reiterated its warning that lengthier processing delays would result from greater fraud concerns while still reviewing ERC Tax Credit claims that were already submitted and received prior to the moratorium. On July 26, the agency said that it was concentrating more on reviewing these claims for compliance issues, including stepping up audit work and launching criminal investigations of promoters and companies making questionable claims. The IRS said today that thousands of ERC claims have been reported for audit, and hundreds of criminal cases are now being investigated.
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The IRS adds that because of the thorough compliance assessments, payments for these claims will still be made during the moratorium period, only more slowly. Existing ERC Tax Credit claims will see a 180-day processing target because of the tougher compliance checks in place during this time, which is substantially longer if the claim is subject to further review or audit. To make sure the claim is valid, the IRS could also ask the taxpayer for further supporting evidence.
How to claim ERC Tax Credit?
- Determine eligibility based on revenue decline or government-mandated shutdowns due to COVID-19.
- Calculate eligible wages and health plan expenses.
- Report the credit on your employment tax return (Form 941) or request an advance payment using Form 7200.
- Offset your employment tax liability with the ERC amount.
- Maintain documentation for substantiation and compliance purposes.
What to do as the IRS works to help businesses facing questionable ERC claims
For IRS applicants with pending cases, consider the alternatives below to see if any will assist.
For those who haven’t filed a claim yet, consider reviewing the guidelines and waiting to file:
- The IRS advises firms contemplating a claim to carefully follow ERC rules during the processing standstill. The IRS recommends firms consult a trustworthy tax expert rather than a tax promoter or marketing agency that profits from ERC claim-cutting apps. The updated Q&A guide may also assist. Careful rule study will indicate that many of these enterprises do not qualify for the ERC, and avoiding a faulty claim would prevent IRS issues.
Withdraw an Existing claim for Businesses that have already Filed:
- Outstanding claim filers should consult a tax professional and review the updated question and answer guide. The IRS has seen several cases of improperly claiming supply chain issues as ERC claims while a business with identical issues seldom passes the eligibility requirements. If they believe they made an error, a company that claimed the ERC and has not been processed or paid by the IRS may withdraw the claim even while their case is under audit.
Wait for the IRS ERC Settlement Program to be Finalized:
- In the fall, the IRS will detail the settlement mechanism that would allow firms to refund ERC claims if they received one in error. The deal would shield corporations from penalties and compliance action. ERC-paid promoter contingency fee businesses are under consideration by the IRS.
Beware of ERC scam promotions
Employers should avoid ERC ads that tell them to “apply” for money by claiming the ERC when they may not qualify. Remember, anybody who fraudulently claims credit must repay it and may incur fines and interest. The ERC may only be claimed on a federal employment tax return. The advertising is on radio, TV, and social media. ERC eligibility marketing may seem like government documents or be sent by texts, emails, or calls.
Report ERC tax-related illegal activities
The IRS encourages people to report:
- Tax-related, illegal activities relating to ERC claims
- People who advocate for illegal and dishonest tax strategies
- Tax return preparers who deliberately prepare Improper returns
Warning signs of aggressive ERC marketing
- Strangers’ advertisements, calls, emails, and messages.
- Claims that the promoter or corporation can determine ERC eligibility in minutes.
- Credit claim costs are high upfront.
- Avoid tax preparers who charge a portion of the Employee Retention Credit refund.
- Promoter confirmation of credit eligibility before discussing taxes.
- Promoter statements encourage claim submission since there is nothing to lose. Those who wrongly received the credit may have to return it with high interest and penalties.
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