Are you considering withdrawing your Employee Retention Credit (ERC) claim or repaying a claim you already received? The IRS has said that they will be releasing details shortly providing a method for employers to withdraw an ERC claim they now think was improper. Here are three things to think about before you pursue a withdrawal.
Warning About Aggressive Promoters
Do you fully understand why you claimed the ERC? Many companies that filed an ERC claim filed it with the best intentions. Their business was negatively affected by Covid-19 and the associated governmental restrictions. Yet, the IRS has recently warned about aggressive promoters marketing ERC filing services.
In that announcement, the IRS describes a moratorium on their processing of new claims and a shift towards reviewing more claims for compliance with the law. The commissioner states, “The IRS is increasingly alarmed about honest small business owners being scammed by unscrupulous actors, and we could no longer tolerate growing evidence of questionable claims pouring in.”
This announcement left many companies wondering if their ERC claim was compliant with law. Over the past two weeks, we have received many inquiries from companies that were unsure whether or not they properly claimed the credit.
If the work was prepared by the company’s payroll provider, did the payroll provider provide any documentation that would substantiate the rationale behind the claim? A company may be eligible for ERC based on the fact pattern of the business and the impact of the Covid-related governmental restrictions; however, what work was done to substantiate that position? Most payroll companies will deliver an ERC claim calculation but generally do not dive into the nuanced questions of employer eligibility and may only rely on an employer’s own attestation for eligibility.
Some questions a manager or owner should ask themselves is, “Do I fully understand this tax position I just took? Am I comfortable taking this significant position based on the information that my vendor provided me? Would I be able to thoughtfully explain this position to the IRS during any inquiry into my claim.” If the answer to any of the above is no, you may want to consider digging into this further.
If the Employee Retention Credit work was prepared by a 3rd party service, how detailed is the deliverable they provided? A company reached out to us with a claim filed by an “ERC mill,” which simply took the business’s number of employees and multiplied it by the maximum amount of ERC for each quarter in which it was filed. This is a red flag since most companies will not be eligible for the entire $26,000 per employee.
Withdraw an ERC Claim or Amend
Does the business really need to withdraw the claim, or should they just amend it? Much of the time, the answer is somewhere in the middle. Many companies that filed for the ERC may have overclaimed certain periods and underclaimed others. We have seen examples of some clients submit claims for periods where they were eligible based on a decline in gross receipts, and not understand that they are also eligible for other quarters based on Covid-related governmental restrictions. Conversely, we have also seen businesses improperly include certain wages that may have been forgiven under a Paycheck Protection Program loan. Many of these and similar issues can be fixed without withdrawing or repaying the claim entirely.
Implications for Withdrawing an ERC Claim
What are the 280C and other income tax implications of withdrawing or repaying a claim? The 280C adjustment is effectively how the ERC is recognized for income statement purposes. It requires amending income tax returns for 2020, 2021, or both to reduce the wage deduction related to the payroll tax credit claimed. A client considering withdrawing an ERC claim should understand those implications including a) was the 280C adjustment already made, and b) if so, what may have to be reversed as a result of not receiving or paying back the ERC.
If you are considering withdrawing or repaying your claim, first talk with an advisor. They can review your filing and help you determine the best course of action.