8555 / What is the CARES Act employee retention tax credit?

Editor’s Note: As of September 2023, the IRS has announced that it will stop processing new ERC claims through at least December 31, 2023. Newly submitted claims will be held in reserve until the IRS once again begins processing claims.

The IRS has repeatedly issued warnings about false or overstated ERC claims. The statute of limitations for IRS challenges to Forms 941 is three years. However, the three-year period does not start to run until April 15 of the calendar year following the year in which the form is filed (i.e., the statute of limitations for 2020 Forms 941 started to run on April 15, 2021 and will expire April 15, 2024). However, there is a special limitations period for the third quarter of 2021. That statute of limitations does not expire until April 15, 2027. Further, proposals would apply the special, longer statute of limitations to any period in which the ERC was available. Taxpayers who received ERC refunds should also be aware that the IRS can challenge the payment in court within two years of the date the refund was paid (five years if the taxpayer obtained the refund based on fraud or misrepresentation).

Planning Point: The IRS has provided new details about a withdrawal process for taxpayers who filed employee retention tax credit (ERC) claims that they now believe to be erroneous. Employers can use the withdrawal process if (1) they made the claim on an adjusted employment return (Forms 941-X, 943-X, 944-X, CT-1X), (2) they withdraw the entire amount of the claim, and (3) the IRS has not paid their claim or they have not cashed/deposited the IRS' refund check. Taxpayers who are not eligible to withdraw a claim can still file an amended return to reduce or eliminate the ERC claim. Taxpayers who filed their ERC claims themselves, have not received, cashed or deposited a refund check and have not been notified their claim is under audit can fax withdrawal requests to the IRS (a special fax line has been set up and details are available at IRS.gov/withdrawmyERC). Taxpayers who are under audit can send the withdrawal request to their examiner or in response to their audit notice. Claims that are properly withdrawn will be treated as though they were never filed, and no interest or penalties will apply. However, taxpayers who willfully filed fraudulent claims or assisted in fraudulent claims need to know that withdrawing the claim will not exempt them from criminal investigations.

Additionally, the agency is working on a program that will allow employers to repay improperly received ERC claims (it is unclear whether these repayments can be made without the threat of criminal investigation).

Under IRS final regulations released in 2023, erroneous refunds of COVID-19-related credits will be treated as underpayments of tax under IRC Sections 3111(a) or (b). Both assessment and administrative collection procedures may apply. The regulations also clarify that if third-party payers claimed tax credits on behalf of common law employer clients, employers against which erroneous refunds of credits can be assessed include anyone treated as an employer under IRC Sections 3401(d), 3405 and 3511. The common law employer client of the third-party payor remains liable for the erroneous refunds of these tax credits.