|The ERTC was initially part of the CARES Act, also known as the Coronavirus Aid, Relief, and Economic Security Act. The $2 trillion stimulus bill was passed in March 2020, and part of its goal was to support businesses during the first months of the COVID-19 pandemic.
At first, the credit was for eligible wages paid between March 12, 2020, and December 31, 2020. At the time, the ERTC was not available to recipients of Paycheck Protection Program (PPP) loans.
But as part of the Consolidated Appropriations Act (CAA), the tax credit was extended through June 30, 2021. And some of the details for qualification to apply changed. For example, the credit became worth 70 percent of up to $10,000 of qualified wages per employee per quarter instead of yearly.
For the purposes of the ERTC, at this time, the meaning of “large employer” was changed to mean those with more than 500 full-time employees. Plus, the CAA made it so PPP recipients could apply for the Employee Retention Tax Credit –provided the payroll identified for the ERTC was not paid out of PPP funds.
More Changes to the ERTC
Later, the American Rescue Plan Act of 2021(ARPA) modified the ERTC further. It was extended through December 31, 2021, and some Recovery Startup Businesses could be eligible for a quarterly credit of up to $50,000.
However, the Infrastructure Investment and Jobs Act, signed into law on November 15, 2021, changed the dates of the ARPA ERTC extension. For many businesses, at that point, the ERTC applied to wages paid between July 1, 2021, and September 30, 2021.
“Most taxpayers became ineligible to claim the ERC for wages paid after September 30, 2021,” according to the IRS. But Recovery Startup Businesses are still eligible to claim the Employee Retention Tax Credit for wages paid on June 30, 2021, and before January 1, 2022.
When you consider the frenetic early days of Covid and the ensuing chaos in our society, we acknowledge the CARES ACT was passed hurriedly with details to follow. The ERTC portion of the law is especially subject to this notion of let’s pass the law and adjudicate the matter later. Modifications to ERTC made in 2021 further muddled the ‘who was eligible and to what extent’ calculus. Remember, ERTC is a tax credit, thus falling under the jurisdiction of the IRS.
The IRS provided limited guidance throughout 2022 and most of 2023. However, their guidance ramped up in the second half of 2023, primarily due to the increase in ERTC claims. Through mid-September, roughly 3.6 million ERTC claims had been made by businesses, with the vast majority of those being filed after June of 2023.
This guidance has significantly narrowed the scope of who was eligible and to what extent. Additionally, as part of the continuing resolution to fund the US government, the IRS has been tasked with identifying erroneous claims and collecting the tax credits for non-compliant ERTC claims.
The IRS is now offering a second amnesty program for those who question their ERTC claims.
On December 21, 2023, the IRS announced a second Employee Retention Credit (ERC) amnesty program, providing businesses that previously applied for and received the ERC the opportunity to return the funds received without facing future penalties related to their filing. In addition, the program allows for the employer to retain 20% of the refund federal income tax-free and to return the remaining 80% on an interest-free/penalty-free basis. This withdrawal process is designed to allow employers who have uncertain ERC eligibility positions — particularly if they utilized a “credit mill” or another unqualified provider — to come forward and return amounts received with limited cost to the organization.
In the release, the IRS provides an explanation for its decision to allow for the return of funds refunded as a result of prior ERC claims filed:
The new disclosure program, which has been in the works for several months, is part of a larger effort at the IRS to stop aggressive marketing around ERC that misled some employers into filing claims.
Further, the IRS is taking a skeptical view regarding claims being filed, with the primary reason being supply disruption.
Which businesses are eligible to utilize the ERC second phase amnesty program?
Businesses must meet several specific factors to reach the eligibility threshold of the ERC amnesty program. All of the below must be met for eligibility:
- The participant is not under criminal investigation, and they have not been notified that the IRS intends to commence a criminal investigation.
- The IRS has not received information from a third party alerting the IRS to the participant’s noncompliance, nor has the IRS acquired information directly related to the noncompliance from an enforcement action.
- The participant is not under an employment tax examination by the IRS for any tax period(s) for which the taxpayer is applying for this Voluntary Disclosure Program.
- The participant has not previously received notice and demand for repayment of all or part of the claimed ERC.
Note that if the business willfully filed a fraudulent claim or conspired to do such, the amnesty program does not relieve the business of potential legal action.
Also, if the business was a client of a Professional Employer Organization (PEO) during the period of the refund request and the PEO filed the adjusted return to claim the benefit, the business must consult with the PEO on its ability to enter into the withdrawal program.
Each circumstance will be different for the validity of your ERTC claim. Almost certainly, there will be tax court decisions that will ultimately decide the actual tax law in this matter.
FMS does not offer ERTC consultative services. This is a specialized area of federal income tax law that is not part of our suite of services. FMS has consistently suggested anyone considering an ERTC claim take a conservative approach and consult with a reputable tax credit firm and your tax preparer before deciding to file any claims.
The current IRS approach to ERTC claims is more aggressive than was the case a few months ago. The IRS is also offering an amnesty program, which would allow you to retain 20% of the original claim with no penalties or interest.
We continue to suggest you work with your claim preparer and/or tax preparer in deciding what is the best disposition in your circumstances regarding your ERTC claim.