The Employee Retention Credit (ERC) continues to dominate the headlines in the new year. From radio and television commercials to social media posts to robocalls, business and restaurant owners are being inundated with information about the ERC. However, all of this information has left many with more questions than answers. This article highlights some of those questions and the latest ERC updates.
Timing to Claim the ERC
Many businesses, including restaurants, are still analyzing their eligibility for the ERC. A common myth is that businesses are running out of time to claim the ERC. There is still plenty of time to file an ERC refund claim. 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. Additionally, there is no limit on the funds available for the ERC. In other words, the program will not “run out of funds.”
Refund Processing Times
Many taxpayers are experiencing refund processing times of four to five months. However, taxpayer wait times for larger refunds have exceeded nine months to one year. Taxpayers can call the Internal Revenue Service (IRS) to check on the status of an ERC refund claim. Note, while the IRS agents can confirm receipt of an ERC claim, they generally cannot provide definitive status updates or exact processing times.
Penalty Relief
IRS guidance explains that a taxpayer that claims the ERC must also amend its federal income tax return to reduce its wage expense by the amount of the ERC for the tax year in which such wages were paid or incurred. The additional income tax due has led to questions about penalties and possible penalty relief. In April 2022, the IRS released IR-2022-89 to remind taxpayers they may be eligible for relief from penalties for failing to pay their taxes if they can show reasonable cause and not willful neglect for the failure to pay. Taxpayers may also be eligible for penalty relief under the IRS’s First Time Penalty Abatement program.
ERC Audits
Your business may get selected for an IRS audit of your ERC. In IRS Notice 2021-20, Question #70, the IRS recommends that taxpayers maintain the following information to substantiate the ERC:
- Documentation to show how the employer determined it was an eligible employer that paid qualified wages, including any applicable government orders, records that were used to determine a more than a nominal effect on business operations, gross receipts decline records, and records documenting qualified wages paid to employees.
- Documentation to show how the employer determined the amount of allocable qualified health plan expenses.
- Documentation related to the determination of whether the employer is a member of an aggregated group treated as a single employer for purposes of the employee retention credit and, if so, how the aggregation affects the determination and allocation of the credit.
- Copies of any completed Forms 7200 that the employer submitted to the IRS.
- Copies of the completed federal employment tax return that the employer submitted to the IRS (or, for employers that use third-party payers to meet their employment tax obligations, records of information provided to the third-party payer regarding the employer’s entitlement to the credit claimed on the federal employment tax return).
If you claimed the ERC and do not have this documentation, you should not wait until the IRS contacts you for an audit to gather it. In regards to record retention, in IRS Notice 2021-20, Question #71, the IRS advises that an eligible employer should maintain all records of employment taxes for at least four years after the date the tax becomes due or is paid, whichever is later.
IRS Warning of Third Parties Promoting Improper ERC Claims
In October 2022, the IRS issued a warning to employers in IR-2022-183: be wary of third parties who are advising them to claim the ERC when they may not qualify. Business owners should be cautious of promises that are too good to be true. Be diligent, ask questions, and make sure all aspects of an ERC claim are properly documented. The ERC has ultimately helped many businesses survive, but it’s also important to understand the risks and the entire process from claim to audit.
If you have questions about the ERC, reach out to Sara Goldhardt or your GBQ Advisor.
Article written by:
Sara Goldhardt
Director, State & Local Tax Services
