Addressing Common IRS Disputes Related to the ERTC
The Employee Retention Tax Credit (ERTC) allows business owners to claim up to $26,000 in tax refunds per qualified employee. The ERTC was introduced as part of the 2020 CARES Act (Coronavirus Aid, Relief, and Economic Security). It was designed to provide relief to small businesses that kept their employees on the payroll, despite revenue declines and shutdowns. The CARES Act has undergone several updates and rule changes since then.
While the updates were intended to help small businesses become eligible to claim higher dollar amounts, confusion and tax credit fraud have become problematic. This article outlines the most common IRS inquiries and disputes related to the ERTC that you might encounter.
Additionally, due to high amounts of fraudulent claims, the IRS has paused processing for a brief time to put measures in place that will prevent fake or misleading claims from being funded.
Understanding Limitations on Eligibility
As a tax credit, the funds are distributed by the IRS. Therefore, it is the IRS that will make inquiries about your claims and initiate a dispute if anything in your ERTC application is inaccurate or suspicious.
Because the rules are so complicated, it’s recommended that you work with experienced tax professionals to ensure that your paperwork is filed right the first time.
The IRS has noted that unscrupulous companies working on a high-percentage contingency basis or those requiring hefty upfront fees have inflated claims and tried to qualify for wages that were not eligible. As a reminder, ERTC eligibility is determined quarterly and requires the following:
- A decline in gross receipts of at least 50% in 2020 and 20% in 2021 compared to the same quarters in 2019, or
- A full or partial suspension mandated by the government in response to the threat of COVID-19
Fund eligibility is determined based on the number of employees who remain on the company payroll, and the credit is calculated as a percentage of wages and other forms of qualifying compensation.
While most businesses, including non-profits, are potentially eligible for ERTC, the IRS notes that individual taxpayers, employees, retirees, and household employers cannot receive this tax credit. Further, employers who didn’t pay wages during the qualified period or experienced only a supply chain disruption (as of a September 14, 2023 update) may run into obstacles.
Tips for Handling IRS Disputes
It can be worrisome to go head-to-head against the IRS, especially in areas regarding disputes resolution. An experienced tax attorney can be helpful in this area because they will be familiar with the law and current ERTC guidelines.
The IRS recommends working with a tax professional to assist with the following:
- Share accurate records of your gross receipts, wage disbursements, and other qualifying information relevant to the ERTC.
- Review prior federal tax returns claiming ERTC and share them with your attorney or tax professional.
- File an amended return if your ERTC claim is excessive.
- File a complaint against the advisor who filed an excessive or fraudulent ERTC claim using Form 14242.
It is important to note that the Internal Revenue Service requires that anyone preparing or filing tax returns, including ERTC applications, must exercise due diligence and ensure their correctness. The person preparing your tax forms can assume in “good faith” that the information provided to them is accurate.
Be honest and transparent with any tax professional who prepares your ERTC application. If a tax professional believes an ERTC claim is excessive, they are obligated under IRS guidelines to correct or mitigate the issue.
Contact an Experienced Tax Professional for Help with ERTC
If you need help claiming the Employee Retention Tax Credit or have worked with another organization that has filed an erroneous claim, contact the experienced tax attorneys at Dayes Law Firm for assistance.