IRS Issues FAQs and 2020-2021 Comparison Chart to Assist Taxpayers with Assessing ERC Compliance

The Internal Revenue Service (IRS) is continuing to prioritize Employee Retention Credit (ERC) compliance—both through enforcement and through initiatives offering claimants the opportunity to self-correct before their ERC filings trigger scrutiny. On August 15, 2024, the IRS announced that it is reopening its ERC Voluntary Disclosure Program (ERC VDP), and this followed several other recent announcements highlighting the agency’s ongoing efforts to uncover and prosecute ERC fraud. Regardless of whether you have been contacted by the IRS, if you have concerns about your business’s ERC filings, it is important that you speak with an experienced Texas tax attorney promptly.

To help businesses self-assess ERC compliance, the IRS has published a 2020-2021 ERC comparison chart and a series of ERC FAQs. This article covers some of the key pieces of information from each of these resources. However, if you have questions or concerns, it is imperative that you seek custom-tailored legal advice, and, again, we strongly recommend that you speak with a Texas tax attorney as soon as possible.

5 Key Facts About the ERC for Businesses With Compliance Concerns in 2024

Not only did the eligibility criteria for the ERC change from 2020 to 2021, but they also changed from quarter to quarter in some cases. This is one reason, among many, why tens of thousands of businesses are now facing scrutiny for possible ERC fraud from the IRS. If you have concerns about ERC compliance in 2024, here are some more key facts from the IRS’s 2020-2021 ERC comparison chart and FAQs:

1. There Were Four Distinct Stages of the Employee Retention Credit

While the IRS is using the label, “2020 vs. 2021 Comparison Chart,” the chart really compares four distinct stages of the Employee Retention Credit. The eligibility criteria for claiming the ERC changed multiple times during the COVID-19 pandemic. The four stages of the ERC were:

• The ERC as originally authorized under the CARES Act of 2020 (March 12, 2020 to December 21, 2020);
• The ERC as extended by the Relief Act of 2021 (January 1, 2021 to June 30, 2021);
• The ERC as extended by the American Rescue Plan Act of 2021 (July 1, 2021 to September 30, 2021); and,
• The ERC as amended by the Infrastructure Investment and Jobs Act of 2021 (October 1, 2021 to December 31, 2021).

To properly claim the ERC, businesses must have complied with each of these statutes’ requirements during the relevant time period. Despite the frequent changes—and the lack of clear guidance from the IRS during the pandemic—confusion is not an excuse for noncompliance.

2. Businesses Can Only Retroactively Claim the ERC for Periods During Which They Would Have Been Eligible

Businesses could file ERC claims retroactively until the IRS placed a moratorium on new claims late last year. When filing retroactive claims, however, businesses were still required to ensure their eligibility for each calendar quarter. Unfortunately, many promoters did not make this clear, and the IRS has blamed promoters for a substantial portion of all fraudulent ERC claims filed in the post-pandemic period.

However, the IRS has also made clear that reliance on a fraudulent ERC promotion scheme is not an excuse for noncompliance. While it has positioned many of its recent initiatives as opportunities for victims of promotion schemes to avoid enforcement, these opportunities are running out. If a business is aware that it submitted a fraudulent ERC claim, or even that it may have submitted a fraudulent ERC claim, this is sufficient for the IRS to seek civil or criminal penalties.

3. Both the ERC Eligibility Criteria and the ERC Calculation Rules Changed Throughout the COVID-19 Pandemic

Not only did the eligibility criteria for claiming the ERC change multiple times during the COVID-19 pandemic, but the rules for calculating the ERC changed throughout the pandemic as well. Critical changes during the pandemic included (but were not limited to):

• Changes to the definition of “qualified wages;”
• Changes to the percentage of “qualified wages” eligible employers could claim;
• Changes to the rules for employees not providing services; and,
• Changes to the rules for “severely financially distressed employers.”

Again, these are just examples. Both for businesses trying to keep up during the pandemic and for businesses attempting to claim the ERC retroactively, these changes (among others) made compliance extremely difficult. At this point, however, the IRS is expecting ERC claimants to go back and ensure that all of their calculations are accurate.

4. Credit Maximums Limited How Much Employers Could Claim

Along with the evolving ERC calculation rules, credit maximums also limited how much employers could claim. These maximums were not widely known, and many promoters failed (or chose not to) disclose them to the businesses they targeted. In 2020, the maximum was $5,000 per employee. This increased to $7,000 in 2021, though the American Rescue Plan Act placed an aggregate $50,000 cap on ERC claims filed by “recovery startup businesses” starting in July 2021.

5. Withdrawal Remains an Option for Businesses that Improperly Claimed the ERC

The IRS’s FAQs include several questions about ERC withdrawal. Even with the reopening of the ERC VDP, withdrawal remains an option—and this will be the best option for many businesses that inadvertently submitted invalid ERC claims. However, as the IRS makes clear, “if you willfully filed a fraudulent ERC claim. . . withdrawing a fraudulent claim will not exempt you from potential criminal investigation and prosecution.” Thus, if you are considering withdrawal, it is important that you discuss your options with a Texas tax attorney to ensure that you are choosing the best option for your specific circumstances.

ERC Questions or Concerns? Request an Appointment with a Texas Tax Attorney Today

If you have questions or concerns about your business’s ERC filings, now is the time to take action. To request an appointment with a Texas tax attorney at Brown Tax, P.C., please call 888-870-0025 or tell us how you prefer to be contacted online today.