All posts by Tax Credit Updates

President Biden's 2024 budget proposing giving the IRS more time to audit ERC claims, possibly reducing ERC payments by $2 million in fiscal year 2024.

President Biden and the IRS are targeting COVID-relief and ERC fraud. A new IRS warning specifically calls out bad actors pushing ineligible people to file.

Daniel Werfel, nominated to be the new IRS Commissioner, responded to these questions from Senators regarding delays to ERC refunds.

The IRS has increased estimates for new Forms 941-X, but even this might be outstripped by the actual number of new ERC claims they are receiving.

California Governor Gavin Newsom included modifications to the New Employment Credit (NEC) in his latest budget. Learn what these changes are.

The IRS is warning employers against ERC fraud. The following examples of fraudulent practices have resulted in fines and/or convictions.

In September, we wrote about a Treasury Inspector General for Tax Administration (TIGTA) report highlighting processing delays at the IRS directly affecting ERC claims. At that time, TIGTA reported they, “found that ongoing and considerable delays in the processing of amended Forms 941 filed by businesses resulted in businesses not timely receiving the immediate financial relief for which this legislation was enacted. As of February 1, 2022, there were 447,435 Forms 941-X waiting to be processed. Over 90 percent (402,814) of these Forms 941-X were over-aged, i.e., have not been processed within 45 calendar days.” Since late 2021, the only available method for filing an ERC claim with the IRS has been via Form 941-X, the Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund. There is no option for filing this form electronically. Mailed or faxed paper returns must be reviewed manually by the IRS, but only after the original Forms 941 have been processed. IRS ERC Claims Update A new report by the Internal Revenue Service Advisory Council (IRSAC) indicates that the backlog problems related to ERC are ongoing: “The Coronavirus Aid, Relief, and Economic Security (CARES) Act introduced the Employee Retention Credit that businesses could claim through the Form 941-X process. Millions of businesses have submitted these forms, but they have not been processed due to significant IRS backlogs in processing paper returns. According to the Taxpayer Advocate, the IRS was backlogged almost three million Forms 941 Employer’s Federal Tax Return, and Forms 941-X.” Similarly, a recent (11/10/2022) blog post by the National Taxpayer Advocate, Erin Collins, said: “Likewise, business taxpayers are continuing to feel the strain of delays in IRS processing. Some business taxpayers are still waiting for pandemic relief benefits, as the IRS has over 250,000 unprocessed Forms 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, in its inventory. Unfortunately, some cannot be processed until the related Form 941, Employer’s Quarterly Federal Tax Return, is processed first, and as of November 2, the IRS still had about 2.5 million Forms 941 in its inventory awaiting processing. I suspect a large portion of the Form 941-X amended returns relate to the Employee Retention Tax Credit authorized by the Coronavirus Aid, Relief, and Economic Security (CARES) Act (2020) and extended by the Consolidated Appropriations Act (2021).” The IRS regularly updates the number of unprocessed Forms 941-X, which have ranged from a high of 446,000 in January 2022 to a low of 199,000 in September 2022. As of November 16, 2022, there are 286,000 unprocessed returns. But what these number don’t tell us are the actual number of ERC claims being made, or at least the number of Forms 941-X being filed. Does the fact that the backlog grew from 199,000 to 286,000 from September to November mean that IRS received 96,000 new forms while processing none, or that they received a much larger number but also processed a large number? According to the IRSAC report, “Millions of businesses have submitted these forms.” What is the basis for this claim? Tracking Forms 941-X and 941 Until very recently, the IRS has not reported the number of Forms 941-X they receive each year. However, in the 2021 Annual Report of the National Taxpayer Advocate, they tell us the average number of Forms 941-X received between calendar years 2018-2020 was 331,492. In calendar year 2021, that number more than doubled to 738,422. Newly reported numbers from the IRS tell us that for fiscal year 2021 (October 1, 2020 – September 30, 2021), they received 564,701 Forms 941-X, and they project receiving 1,087,800 in fiscal year 2022. While that fiscal year has ended, final counts are apparently not yet available. Apparently, IRSAC’s assertion that, “Millions of businesses have submitted these forms,” must include both amended 941-X returns and Forms 941 original returns. Projecting Future Claims Using the available information, at the beginning of fiscal year 2022, IRS started with a backlog of about 376,000 unprocessed Forms 941-X. Using their recent estimate, they received approximately 1.1 million new forms through September 2022. They ended September 2022 with a backlog of 199,000, meaning they processed between 1.2 and 1.3 million returns during the fiscal year. IRS projects the number of Forms 941-X for fiscal year 2023 will fall to about 677,000. But if the IRS was able to process over 1.2 million forms last fiscal year, the increase in the backlog of unprocessed returns from September through November indicates a rate of new forms well beyond that projection. Learn more about claiming the ERC by speaking with an Experian Employer Services tax expert.

Some tax advisors are misstating the rules related to deadlines for Employee Retention Credit (ERC) claims. They may say that amendments can be filed up to three years from each quarterly payroll tax filing date, resulting in a separate deadline to apply for the ERC for each calendar quarter. They say, for example, that the deadline to amend the second quarter of 2020 is July 31, 2023 (i.e. three years from the filing deadline of 7/31/2020). In one instance, an advisor claims that, “The ERTC deadline is March 12th, 2023.” Others are making the erroneous statement that, “The program could run out of allocated funds at anytime [sic],” while also urgently warning, “Time is of the essence.” What are the actual deadlines for filing an ERC claim? There are only two deadlines: For all quarters in 2020, the deadline to apply for the ERC is April 15, 2024, and for all quarters in 2021, the deadline is April 15, 2025. Download our ERC White Paper The ERC can only be filed using an IRS Form 941-X, “Adjusted Employer's quarterly Federal Tax Return or Claim for Refund.” A separate 941-X will be filed for each calendar quarter for which ERC is being claimed. While original Forms 941 are due by the last day of the month that follows the end of each quarter, and amendments to federal tax returns generally need to be filed within three years of the original due dates, 941-X amendments are a little different. The instructions to Form 941-X state: Is There a Deadline for Filing Form 941-X? Generally, you may correct overreported taxes on a previously filed Form 941 if you file Form 941-X within 3 years of the date Form 941 was filed or 2 years from the date you paid the tax reported on Form 941, whichever is later. You may correct underreported taxes on a previously filed Form 941 if you file Form 941-X within 3 years of the date the Form 941 was filed. We call each of these time frames a “period of limitations.” For purposes of the period of limitations, Forms 941 for a calendar year are considered filed on April 15 of the succeeding year if filed before that date. That last sentence is the key, “For purposes of the period of limitations, Forms 941 for a calendar year are considered filed on April 15 of the succeeding year if filed before that date.” This rule is derived from Section 6513 of the Code in which subsection (c) “Return and payment of Social Security taxes and income tax withholding,” includes the rule that, “(1) If a return for any period ending with or within a calendar year is filed before April 15 of the succeeding calendar year, such return shall be considered filed on April 15 of such succeeding calendar year.” This means that while the Form 941 for the second quarter of 2020 was originally due on 7/31/2020; the third quarter was due on 10/31/2020; and the fourth quarter was due on 1/31/2021, all of those returns are considered filed on 4/15/2021, setting the three-year statute of limitations for amending any of those returns as 4/15/2024. (The instructions to Form 941-X explain, “any corrections to the employee retention credit for the period from March 13, 2020, through March 31, 2020, should be reported on Form 941‐X filed for the second quarter of 2020.”) All of this being said, it’s not advisable to wait until the very end. Learn more about our solutions for tax credits including the ERC.

There are several updates for employer tax credit programs in recent weeks relevant to businesses. These include an explanation from the IRS Chief Counsel on the proper treatment of improperly forgiven PPP loans, an update from a coalition of nonprofits seeking a retroactive restoration of the Employee Retention Credit (ERC), and new guidance from the IRS on the Work Opportunity Tax Credit (WOTC). IRS Chief Counsel Memo: Proper Treatment of Improperly Forgiven PPP Loans A new Chief Counsel memo dated August 19, 2022, explains that while Congress excluded forgiven PPP loans from gross income in the Consolidated Appropriations Act, 2021 (Pub. L. 116–260), if forgiveness was obtained despite not meeting the requirements for that forgiveness, the loan proceeds should then be included in gross income. They conclude: “If a taxpayer who does not factually satisfy the conditions for a qualifying forgiveness causes its lender to forgive the PPP loan by inaccurately representing that the taxpayer satisfies them, the taxpayer may not exclude the amount of the forgiven loan from gross income under 15 U.S.C. § 636m(i) or section 276(b)(1) of the CTRA 2020.” PPP loans were administered through the Small Business Administration (SBA), and IRS does not have direct jurisdiction over the issues involving the loans or their forgiveness. However, this aspect of taxable income treatment enables the IRS to get involved in the PPP loan forgiveness area. For taxpayers who took advantage of both the PPP and ERC programs, there is also a tax implication, namely the proper interaction of forgiven PPP loan funds and ERC qualified wages. This gives the IRS yet another angle to investigate the proper use of PPP loan funds. Nonprofits Reiterate Request to Restore ERC A coalition of nonprofit organizations have updated and resent their letter to President Biden and Congressional leaders. The update, dated September 13, 2022, includes their request “to retroactively restore the Employee Retention Tax Credit, as proposed in the bipartisan ERTC Reinstatement Act (H.R. 6161/S. 3625), extend this refundable payroll tax credit through 2022, and modify nonprofit eligibility beyond the current ‘gross receipts’ test and definition of eligible payroll expenses to include child care and education subsidies.” There does not appear to be any serious discussion in Congress to extend this employer tax credit program. IRS Updates WOTC Guidance A press release from the IRS alerts taxpayers to an update of their WOTC information webpage. As noted in the press release, the new information includes an emphasis on the pre-screening requirement that has been part of the program since its inception in 1996. It is interesting that IRS is choosing to highlight and reiterate rules that have always existed. Prior to the update, the relevant text read: Pre-screening and Certification. An employer must obtain certification that an individual is a member of the targeted group, before the employer may claim the credit. An eligible employer must file Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, with their respective state workforce agency within 28 days after the eligible worker begins work. Employers should contact their individual state workforce agency with any specific processing questions for Forms 8850. The revised text reads: Pre-screening and Certification An employer must pre-screen and obtain certification from the appropriate Designated Local Agency (referred to as a State Workforce Agency or SWA) that an employee is a member of a targeted group to claim the credit. To satisfy the requirement to pre-screen a job applicant, on or before the day that a job offer is made, a pre-screening notice (Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit) must be completed by the job applicant and the employer. The Targeted Jobs Tax Credit (TJTC), which preceded WOTC, did not contain a pre-screening requirement. In enacting WOTC to replace the TJTC in 1996, Congress included the requirement that employers pre-screen job applicants before or on the same day the job offer is made. In doing so, Congress emphasized that the WOTC is a subsidy designed to incentivize the hiring and employment of individuals who are members of targeted groups. On page two of Form 8850, there are four dates that must be provided before Form 8850 can be submitted to a SWA. They are the dates that the job applicant Gave information, Was offered job, Was hired, and Started the job. To confirm that the employer pre-screens the job applicant, and obtains information provided by the job applicant on the basis of which the employer believes that the job applicant is a member of a targeted group, the date the applicant Gave information about being a targeted group member must be a date that is the same as, or before the date the applicant Was offered job. The dates that the job applicant Was hired and Started the job must be on or after the dates the applicant Gave information and Was offered job. Form 8850 including the dates entered on page two of Form 8850, must be signed under penalties of perjury and must be submitted to the SWA (or postmarked, if mailed) no later than 28 days after the date that the job applicant Started the job. Some individuals have a Conditional Certification (DOL-ETA Form 9062) issued by partnering agencies or SWAs. Employers can contact their SWAs for more information on Conditional Certifications. If an employer does not receive a certification on or before the day that the individual begins work, the employer must request certification by submitting Form 8850, to the SWA of the state in which their business is located (where the employee works) within 28 days of the individual beginning work. Employers should contact their SWA with any specific processing questions for Form 8850. Experian Employer Services tax experts regularly monitor and track updates to employer tax credit policies. Learn more about our tax credit solutions here.

The ERC is based on a percentage of qualified wages but can vary depending on the determination of classifying as a large or small eligible employer.

The Treasury Inspector General for Tax Administration has issued a new report on IRS ERC refund processing delays affecting employers.

The Inflation Reduction Act has implications for tax credits. Here's how it affects WOTC, Empowerment Zone credits, ERC and more.