President Biden recently unveiled his fiscal year 2024 budget. Presidential budget proposals are primarily political documents articulating the administration’s values and priorities. Still, many of the details will be considered by Congress as it crafts final budget legislation. While the fiscal year ends September 30, 2023, it is unlikely that Congress will pass an actual budget before the end of 2023, and in some prior years, the process has even extended into the following calendar year. The FY 2024 budget proposal includes a proposal to extend the Internal Revenue Services’ (IRS) timeline for reviewing employee retention tax credit (ERC) claims.
Related: ERC Overview and Preparing for an IRS Audit
As the Department of the Treasury website explains, “To accompany the Administration’s Budget, Treasury releases the ‘General Explanations of the Administration’s Revenue Proposals’ which explains the Administration’s revenue proposals for that fiscal year.” This document is known as the “Greenbook.”
“Current Law
“The Families First Coronavirus Response Act of 2020 (FFCRA) enacted the paid sick and family leave tax credit (the paid leave tax credit) entitling certain employers to a refundable tax credit for the payment of qualified leave wages. The Coronavirus Aid, Relief, and Economic Security Act of 2020 (CARES Act) enacted the employee retention tax credit (ERTC) entitling certain employers to a refundable tax credit for the payment of qualified wages. The paid leave tax credit under the FFCRA and the ERTC under the CARES Act applied to wages paid during the second, third, or fourth quarters of 2020. Subsequent legislation – the COVID-Related Tax Relief Act of 2020 (Relief Act) and American Rescue Plan Act of 2021 (ARP) – extended the paid leave tax credit for qualified leave wages paid during the first, second or third quarters of 2021 and extended the ERTC for qualified wages paid during the first, second, third or fourth quarters of 2021. ARP also codified the paid leave credit and ERTC provisions in the Internal Revenue Code (Code). (The Infrastructure Investment and Jobs Act of 2021 amended the ERTC to apply only to wages paid prior to October 1, 2021, except for employers in limited circumstances.)
“These credits were claimed on employment tax returns, which generally are filed quarterly on Form 941 (with a small number of employers, including household employers, filing annually on other forms). The due date for a quarterly Form 941 filing generally is the last day of the month following the quarter to which it applies – e.g., the due date for Form 941 in the first quarter of 2021 was April 30, 2021. The Relief Act expanded ERTC eligibility and applied retroactively to quarters with filing due dates that already had passed. To claim the ERTC for a prior quarter, an employer is required to file an amended employment tax return, generally on Form 941-X, for each earlier quarter.
“In general, taxpayers must file a claim for credit or refund within the later of three years from the time the tax return was filed or 2 years from the time the tax was paid. For this purpose, if an employment tax return for a period ending with or within a calendar year is filed before April 15 of the succeeding calendar year, the return is considered filed on April 15 of that succeeding calendar year. For example, all timely filed Forms 941 for any quarter of 2020 are considered filed on April 15, 2021. Thus, an employer that timely filed and paid employment tax may file a claim for ERTC with respect to any quarter of 2020 by filing an amended employment tax return, generally Form 941-X, until April 15, 2024. For all timely-filed Forms 941 for any quarter of 2021, the same deadlines apply as in the previous sentence, but one year later.
“Generally, the Internal Revenue Service (IRS) must assess taxes within three years after a return’s original filing date (whether or not the return was filed on or after the due date). The timing for when a return is considered ‘filed’ for this purpose is similar to the rule as it pertains to the time for filing a claim for credit or refund on an amended return: if an employment tax return for a period ending with or within a calendar year is filed before April 15 of the succeeding calendar year, the return is considered filed on April 15 of that succeeding calendar year. The general period of limitations on assessment does not restart upon the filing of an amended return.
“As a result of these timing rules, it is often the case that the statute of limitations on assessment expires at the same time as the deadline for a taxpayer to submit a claim for credit or refund on an amended return. For example, all timely-filed employment tax returns for all four quarters of 2020 are treated as filed on April 15, 2021 for the purpose of the statute of limitations on assessment. Furthermore, current law generally allows an employer that timely filed a Form 941 for any quarter of 2020 to submit a claim for credit or refund for that quarter of 2020 as late as April 15, 2024 (three years after April 15, 2021); the statute of limitations on assessment for this taxpayer would also expire on April 15, 2024 (three years after April 15, 2021).
“ARP extended the limitation on the time period for the assessment of any amount attributable to the paid leave tax credit and the ERTC under the Code that was improperly claimed from three to five years. Thus, the limitation period for assessment of erroneous ARP paid leave credits and ERTC will not expire before the date that is five years after the later of (1) the date on which the original return that includes the calendar quarter with respect to which the paid leave credit or ERTC is determined is filed, or (2) the April 15 date on which the return is treated as filed. However, the ARP extension of the limitations period applies only for the second and third quarters of 2021 for the paid leave tax credit and the third and fourth quarters of 2021 for the ERTC. The FFCRA and the CARES Act did not include extensions of the limitations period. Hence, the ARP’s extended limitations period applies only for two of the six quarters in which an employer may claim the paid leave tax credit and only for two of the eight quarters in which an employer may claim the ERTC.
“Reasons for Change
“Providing a consistent rule for the limitations period to assess erroneous FFCRA paid leave credits and the CARES Act ERTC, as amended prior to the ARP, would assist with IRS compliance and enforcement efforts. Additionally, the majority of dollars of ERTC claims were made on amended tax returns, often with a substantial delay relative to the quarter of the underlying activity that generated the credit. As the current-law three-year limitations period applicable to the FFCRA paid leave credits and the CARES Act ERTC does not restart when an amended return is filed, a three-year assessment limitations period makes it difficult for the IRS to audit the amended returns and timely assess any tax, if warranted.
“Proposal
“The proposal would extend the limitations on the time period for the assessment of erroneous paid leave tax credits under the FFCRA and the ERTC under the CARES Act, as amended prior to the ARP, to conform with the same five-year period provided under ARP.
“The proposal would be effective on the date of enactment.”
The accompanying revenue estimate tables in the Greenbook indicate that allowing IRS more time to examine ERC claims would reduce ERC payments (otherwise known as budgetary outlays) by $2 million in fiscal year 2024, $35 million in 2025, and $119 million in 2026, with additional reductions in future years totaling an estimated $285 million over ten years. A detailed budget appendix along with this proposal for the IRS indicates that the government has already paid almost $22.5 billion in ERC claims in fiscal year 2022 and estimates that will increase to nearly $23 billion in 2023 while falling to under $10 billion in 2024.