In March 2020, to help business owners impacted by the Covid pandemic, the CARES Act introduced three new employer tax credits: the Sick Leave Credit, the Family Leave Credit, and the Employee Retention Tax Credit. The Employee Retention Tax Credit (ERTC), or less formally, the Employee Retention Credit, (ERC) was eventually expanded and extended to increase the credit amount and the life of the credit. Many companies quickly filed an amended federal tax return to claim the ERC and, as a refundable credit, eagerly awaited the promised refund.
But they may still be awaiting that ERC refund. A recent report by the Department of Treasury noted that an internal investigation showed that over 440,000 amended payroll tax returns were awaiting processing earlier this year. Over 90% of that population was considered overdue as they had been unprocessed for more than 45 days, with more than 13% or 60,885 being more than six months old.
Processing Delays
This severe backlog of Employee Retention Credit claims was created partly because the IRS got off to a slow start in processing amended payroll tax returns claiming the credit. It took almost 12 months from the time the credit was enacted before the IRS started processing returns. Part of this was due to shutdowns caused by the pandemic. The slow release of guidance and procedures accounted for additional delays in start the review of filed federal tax returns. And changes introduced by subsequent legislation resulted in further delays. However, even with that, the Treasury Department notes that the delay was excessive and unjustified.
As a result, businesses that have filed an amended return and are awaiting the ERC refund may still be waiting for some time as the IRS continues to work through the backlog. While you can contact the IRS, if the return has not been reviewed, there will not be much you can do at this point.
Lack of Examination of Returns
Another finding by the Department of Treasury is that the IRS is failing to identify and refer certain returns for examination. If a return meets specific criteria, it should be referred to the examination team for a closer look and possibly a full audit. This ensures fraudulent claims are identified before a refund is issued. Employees who were interviewed either simply ‘forgot’ to refer cases, were unclear about the criteria for making a referral because of vague guidance and training, or were confused because the direction constantly changed.
While this might seem like good news for taxpayers receiving refunds, it is likely just a delay resulting in a more costly remedy. If an amended return results in a refund that is later audited and found to be incorrect, there will be additional penalties and interest that would not have been assessed if the refund was never paid in the first place.
At this point, it is likely safe to assume that the IRS will be slowing down the process to allow for more time to review the credits. The potential for fraud is high with this credit, and the IRS has been gearing up audit more of the claims.
About the Employee Retention Credit
The Employee Retention Credit is a tax credit designed to encourage businesses to keep employees on payroll despite business disruptions caused by the Coronavirus during 2020 and 2021. Any eligible employer that experienced a decline in gross receipts or experienced a partial shutdown of operations due to a government order may qualify for the credit. It is available to any industry that meets either criterion.
For the tax year 2020, the refundable tax credit could be up to $5,000 per employee for eligible employees. For 2021, this increased to $21,000 per employee. The credit is based on the qualified wages paid during each eligible period. The credit can be claimed retroactively on the applicable amended federal tax return (Form 941-X) and is refundable. While a company that received PPP loan forgiveness cannot claim the credit on the same wages, it is not a total bar to claiming the tax credit. A small business (based on the number of full-time employees) get additional benefits from the credit.
While the credit depends on information from 2019, there are special rules for recovery startup businesses that were started after the COVID-19 pandemic hit.
If you are having issues with your ERC claim, or would like to learn more about whether you qualify for ERC, contact us today to set up a time to talk.