Misleading Tax Relief Claims Spark IRS Response: A Guide for Small Businesses Navigating the Employee Retention Credit

Many were misled, Erin Collins asserts, in the wake of numerous businesses erroneously claiming the pandemic-induced tax relief.  As the National Taxpayer Advocate, Ms. Collins has some thoughts regarding the Employee Retention Credit.

In the face of COVID-19, the Employee Retention Credit (ERC) was implemented to aid small businesses. There’s still a window to correct returns and claim the credit, offering up to $5,000 per employee for 2020 or $28,000 per employee for 2021.

The opportunity, however, has given rise to a surge of specialist firms that falsely assure business owners of their eligibility for the intricate tax relief, experts observe.

“Regrettably, individuals were misled,” voiced Erin Collins, the National Taxpayer Advocate, during her address at this month’s annual conference of the American Institute of Certified Public Accountants. She further indicated that people may have already claimed the credit and even received a refund.

Last October, the IRS cautioned business owners about the ‘third parties’ promoting the ERC and reiterated its warning by including this issue in its 2023 Dirty Dozen list of tax frauds.

As the latest IRS Data Book indicates, as of March 3, more than 866,000 companies have claimed and received ERCs, amounting to over $152.6 billion.

Presently, the IRS is grappling with a backlog of Form 941-Xs, the adjusted employer’s quarterly federal tax return forms, that businesses need to submit to amend returns and claim the ERC for 2020 or 2021. According to the IRS, there were about 537,000 unprocessed Form 941-Xs as of June 14.

The IRS is devising guidance for those who may have inaccurately claimed the credit, asserts Collins.

She informed CNBC in early June, “I think some are now experiencing regret.” She also advised those ineligible to start contemplating ways to “reverse this” if they realize they are not eligible. “The best course is to step forward first,” advised Rosemary Sereti, Deloitte Tax’s managing director and former IRS senior executive, when addressing mistakes related to the ERC. “Once [the IRS] approaches you, it’s somewhat late.”

It’s noteworthy that the existing backlog of Form 941-Xs also includes many “legitimate claims” for the ERC, which are on hold while the IRS examines the filings, Collins added. The IRS website mentions that they are processing the backlog at two locations with “trained staff” to scrutinize potential Covid-19 credits.

If you inaccurately claimed the ERC, an IRS penalty may be imposed, warns Debra Estrem, Deloitte Tax’s managing director of private wealth controversy, formerly working at the IRS Office of the Chief Counsel.

She stated that you may be subjected to the “erroneous claim for refund or credit penalty,” generally 20% of the excessive amount claimed. The penalty type, however, depends on whether the error was on the original filing or an amended return.