With a key March 22 deadline rapidly approaching, the Internal Revenue Service renewed calls for businesses to review the Employee Retention Credit (ERC) guidelines to avoid future compliance action for improper claims.

Amid aggressive marketing that misled many businesses into filing claims for ERC, the IRS has sharply increased compliance action through audits and criminal investigations – with more activity planned in the future. To help those who were misled, the IRS has made a limited-time offer available to employers through March 22 to correct improper claims at a sharp discount.

“The window of opportunity is closing for those with questionable claims to fix things before they receive follow-up compliance action,” said IRS Commissioner Danny Werfel. “We strongly urge businesses to review the Employee Retention Credit guidelines immediately before a key disclosure program closes, especially if they encountered a high-pressure push to apply for these credits. Taking action now will avoid potentially hefty penalties and interest if the IRS takes action later. The deals available now are good, and the cost and risk for bad claims will sharply escalate over time.”

Employers who improperly claimed ERC can avoid penalties and interest – and even get a discount on repayments if they apply by March 22, 2024, to the ERC Voluntary Disclosure Program. The IRS also offers a special claim withdrawal process for businesses whose claim is still pending. Taking steps now to resolve these issues can help businesses get right and avoid future IRS actions.

The IRS is urging this review because some ERC promoters shared misleading information or misrepresented eligibility rules and lured businesses to apply for the ERC when they didn’t qualify. Some promoter groups may have called the credit by another name, such as a grant, business stimulus payment, government relief or other names, so even if the terms Employee Retention Credit and Employee Retention Tax Credit don’t sound familiar, businesses should still review their records.

The IRS has two programs to voluntarily resolve improper claims and reduce costs and follow-up steps for businesses who fell for misinformation and aggressive marketing about the ERC.

• The ERC Voluntary Disclosure Program, available through March 22, 2024, is for employers who need to repay ERC they received by December 21, 2023, either as a refund or as a credit on a tax return. This option lets a taxpayer repay the incorrect ERC, minus 20 percent, for any tax period they weren’t eligible for ERC. Generally, businesses who enter this program don’t have to amend other returns affected by the incorrect ERC and don’t have to repay interest they received from the IRS on an ERC refund.
• Businesses should quickly pursue the claim withdrawal process if they need to ask the IRS not to process an ERC claim for any tax period that hasn’t been paid yet. Taxpayers who received an ERC check but haven’t cashed or deposited it can also use this process to withdraw the claim and return the check. The IRS will treat the claim as though the taxpayer never filed it. No interest or penalties will apply.

After these programs end, the IRS will continue a wide range of tax compliance activities on ERC claims to protect taxpayers and enforce the tax law. If the IRS finds an ERC claim to be incorrect after these programs end, the agency can disallow unpaid claims or require repayment with penalties and interest from taxpayers who received ERC. The taxpayer also may need to amend related returns. The IRS is required to use a variety of collection tools to recapture incorrect ERC payments or credits.

“We have good solutions for taxpayers to do the right thing now and avoid hassles and expenses for themselves later – but March 22 is rapidly approaching,” Werfel said. “The domino effect of an incorrect claim can cost a business valuable time, energy and money down the road. We urge businesses to talk to a trusted tax professional and review their situation.”

Under the ERC Voluntary Disclosure Program, a business that incorrectly claimed and received $50,000 for a tax period when it wasn’t entitled to ERC would need to repay only $40,000 after the program’s 20% discount – and no penalties or interest if the taxpayer pays the amount in full.

Alternatively, if the business doesn’t apply to the VDP and the IRS identities an incorrect claim, the business would owe $50,000, and might also owe penalties and interest computed from the date the business received the ERC. For some, this was two to three years ago. Interest compounds daily and the failure-to-pay penalty accrues monthly and can build to 25%. Other penalties could apply to certain situations. So that’s $50,000 – plus possibly penalties and compounding interest, which is far more costly compared to the voluntary options available. A business in this situation may also need to amend related returns, which can add more cost.

Some promoters told taxpayers every employer qualifies for ERC. The IRS and the tax professional community emphasize that this is not true. Eligibility depends on specific facts and circumstances. The IRS has dozens of resources to help people learn about and check ERC eligibility and businesses can also consult their trusted tax professional. Key IRS materials include:

• ERC Eligibility Checklist (interactive version and a printable guidePDF) includes cautions about common areas of misinformation and links to facts and examples.
• 7 warning signs ERC claims may be incorrect outlines tactics that unscrupulous promoters have used and why their points are wrong.
• Frequently asked questions about the Employee Retention Credit includes eligibility rules, definitions, examples and more.

Businesses that can’t pay in full can apply to ERC Voluntary Disclosure Program

Taxpayers who can’t pay the full amount of ERC, minus 20%, by the time they return their signed closing agreement can still apply to the ERC Voluntary Disclosure Program and request an Installment Agreement to pay over time. Businesses who need an installment plan need to submit Form 433-B, Collection Information Statement for BusinessesPDF with their VDP application by March 22 along with any required documents to support it. They also may need a signed Form 2750, Waiver Extending Statutory Period for Assessment of Trust Fund Recovery PenaltyPDF. See Payment options for accepted ERC-VDP applications for details.

If a taxpayer is unable to pay the full amount of ERC, minus 20%, then an IRS collection team member will be assigned the case after the closing agreement is executed and will look to offer a resolution that fits the taxpayer’s current financial condition and ability to pay.

Under an Installment Agreement, the business must make monthly payments. Interest and penalties that normally apply to a tax liability will apply starting from the ERC Voluntary Disclosure Program closing agreement date. This date, however, is better for businesses than an agreement outside of the ERC Voluntary Disclosure Program where the penalties and interest date back to when the business received the incorrect ERC.

Processing updates

On Sept. 14, 2023, amid concerns about aggressive ERC marketing, the IRS announced a moratorium on processing new claims. A specific resumption date hasn’t been determined.

The IRS continues to process ERC claims submitted before the moratorium, but with more scrutiny and at a much slower rate than before the agency’s approach changed last year.

Source: IRS-2024-72, March 15, 2024

WASHINGTON – The Internal Revenue Service’s Free File Guided Tax Software service has seen a year-over-year increase of nearly 10% so far this filing season, according to new statistics released today.

Through Feb. 24, 943,000 taxpayers had filed tax returns this tax season through IRS Free File, a 9.7% increase from last year’s comparable period when 860,000 tax returns were filed.

The Free File increase occurs as the IRS continues to see a strong start to the 2024 filing season. Through Feb. 24, the IRS had delivered more than 28.9 million refunds to taxpayers worth $92.9 billion. The average refund this year is $3,213, up 4.3% from 2023.

Now in its 22nd filing season, taxpayers across the nation can access free software products provided by IRS Free File trusted partners by visiting IRS.gov. Through this public-private partnership, tax preparation and filing software providers make their online products available to eligible taxpayers. Eight private-sector Free File partners provide online guided tax software products this year to any taxpayer with an Adjusted Gross Income (AGI) of $79,000 or less in 2023. Free access to online products is only available by starting from IRS Free File.

Those with an AGI over $79,000 can use the IRS’s Free File Fillable Forms. This product is best for people comfortable using IRS form instructions and publications when preparing their own taxes.

Free File is one of many free options available for taxpayers. The IRS has a special free help page on IRS.gov that provides an easy way of seeing many of the free services and options to features and options to help people with their taxes.

How to use Free File on IRS.gov

To find the right IRS Free File product, taxpayers can:

1. Go to IRS.gov/freefile,
2. Click on Explore Free Guided Tax Software button. Then select the Find Your Trusted Partner tool for help in finding the right product, or
3. Use the Browse All Trusted Partners tool to review each offer,
4. Select the desired product, and
5. Follow the links to the trusted partner’s website to begin their tax return.

For 2024, the following trusted partners are participating in IRS Free File:

• 1040Now
• Drake (1040.com)
• ezTaxReturn.com
• FileYourTaxes.com
• On-Line Taxes
• TaxAct
• TaxHawk (FreeTaxUSA)
• TaxSlayer

For 2024, ezTaxReturn.com is providing an IRS Free File product in Spanish. Visit IRS Free File: Do your taxes for free for more information.

Source: IRS-2024-58, March 1, 2024

In the continuing effort to improve tax compliance and ensure fairness, the Internal Revenue Service announced a new effort today focused on high-income taxpayers who have failed to file federal income tax returns in more than 125,000 instances since 2017.

The new initiative, made possible by Inflation Reduction Act funding, begins with IRS compliance letters going out this week on more than 125,000 cases where tax returns haven’t been filed since 2017. The mailings include more than 25,000 to those with more than $1 million in income, and over 100,000 to people with incomes between $400,000 and $1 million between tax years 2017 and 2021.

These are all cases where IRS has received third-party third party information—such as through Forms W-2 and 1099s—indicating these people received income in these ranges but failed to file a tax return. Without adequate resources, the IRS non-filer program has only run sporadically since 2016 due to severe budget and staff limitations that didn’t allow these cases to be worked. With new Inflation Reduction Act funding available, the IRS now has the capacity to do this core tax administration work.

“At this time of year when millions of hard-working people are doing the right thing paying their taxes, we cannot tolerate those with higher incomes failing to do a basic civic duty of filing a tax return,” said IRS Commissioner Danny Werfel. “The IRS is taking this step to address this most basic form of non-compliance, which includes many who are engaged in tax evasion. This is one of the clearest examples of the need to have a properly funded IRS. With the Inflation Reduction Act resources, the agency finally has the funding to identify non-filers, ensure they meet this core civic responsibility, and ultimately help ensure fairness for everyone who plays by the rules.”

This week, the IRS will begin mailing these compliance alerts for failure to file a tax return, formally known as the CP59 notice. About 20,000 to 40,000 letters will go out each week, beginning with the filers in the highest-income categories. The IRS noted that some of these non-filers have multiple years included in the case count so the number of taxpayers receiving letters will be smaller than the actual number of notices going out.

People receiving these letters should take immediate action to avoid additional follow-up notices, higher penalties as well as increasingly stronger enforcement measures. People in this category should also consult with a trusted tax professional so they can quickly file their late tax returns and pay delinquent tax, interest and penalties. The failure-to-file penalty amounts to 5% of the amount owed every month – up to 25% of the tax bill. There is also special non-filer information on IRS.gov that can assist them.

Since the IRS is not aware of the potential credits and deductions these people may have, the amount of potential revenue to be gained from this effort is uncertain. The third party information on these taxpayers indicates financial activity of more than $100 billion. Even with a conservative estimate, the IRS believes hundreds of millions of dollars of unpaid taxes are involved in these cases. At the same time, some non-filers may actually be owed a refund.

“If someone hasn’t filed a tax return for previous years, this is the time to review their situation and make it right,” Werfel said. “For those who owe, the risk will just grow over time as will the potential for penalties and interest. These non-filers should review information on IRS.gov that can help and consider talking to a trusted tax professional as soon as possible.”

The new non-filer initiative is part of a larger effort underway with the IRS working to ensure large corporate, large partnership and high-income individual filers pay the taxes they owe. Prior to the Inflation Reduction Act, more than a decade of budget cuts prevented the IRS from keeping pace with the increasingly complicated set of tools that the wealthiest taxpayers use to shelter or manipulate their income to avoid taxes. The IRS is now taking swift and aggressive action to close this gap.

The IRS has a variety of efforts underway to improve tax compliance in overlooked areas where the agency did not have adequate resources prior to Inflation Reduction Act funding.

For example, the IRS is continuing to pursue millionaires that have not paid hundreds of millions of dollars in tax debt. The IRS has collected nearly $500 million in ongoing efforts to recoup taxes owed by 1,600 millionaires with work continuing in this area. In other areas, the IRS is pursuing multi-million-dollar partnership balance sheet discrepancies, ramping up audits of more than 75 of the largest partnerships using artificial intelligence (AI) as well as other areas.

The new non-filer effort focused on high-income taxpayers who haven’t submitted a tax return is part of this larger effort to expand IRS compliance work to ensure fairness in the tax system.

High-income non-filers: IRS actions escalate if tax returns aren’t filed

People who don’t respond to the non-filer letter will receive additional notices and other enforcement actions. Ultimately, this can lead to a variety of IRS compliance activity, including collection and audit action as well as potential criminal prosecution. As part of this, the IRS can also take steps to file what’s known as a Substitute for Return (SFR).

If a person repeatedly fails to respond and does not file, the IRS may create a substitute tax return for the taxpayer. The IRS calculates this substitute tax return based on wages and other income reported to the agency by employers, financial institutions and others. The return factors in the tax, penalty and interest owed by the taxpayer.

This tax return might not give the person credit for deductions and exemptions they may be entitled to receive because the IRS does not know each taxpayer’s situation. In this scenario, the IRS will send a notice of deficiency CP3219N (a 90-day letter) proposing a tax assessment. The taxpayer will have 90 days to file the past due tax return or file a petition in Tax Court. If the person does neither, the IRS will proceed with the proposed assessment.

If the IRS files a substitute return, it is still in the person’s best interest to file their own tax return to take advantage of any exemptions, credits and deductions they are entitled to receive. The IRS will generally adjust the account to reflect the correct figures.

The tax return the IRS prepares for these taxpayers will likely lead to a tax bill, which, if unpaid, will trigger the collection process. This can include such actions as a levy on wages or a bank account or the filing of a notice of federal tax lien. If a taxpayer repeatedly does not file, they could be subject to additional enforcement measures, such as additional penalties and/or criminal prosecution.

Source: IRS-2024-56, Feb. 29, 2024

Supplemental application period runs from Feb. 26 through April 10

The Internal Revenue Service today announced it will accept supplemental applications from all qualified organizations for Low Income Taxpayer Clinic (LITC) matching grants from Feb. 26 to April 10.

“LITCs help protect taxpayer rights and ensure justice for thousands of taxpayers across the country,” said National Taxpayer Advocate Erin M. Collins. “Some communities that are underserved, or do not have any clinics to help those taxpayers who have nowhere else to turn, need the assistance that a clinic can provide. The supplemental grant period is a chance for eligible organizations to apply for funding that can help make a difference for vulnerable taxpayers and grow the LITC presence in areas with the greatest need.”

The funding and the period of performance for the grant will be July 1 to Dec. 31. Under Internal Revenue Code (IRC) section 7526, the IRS awards matching grants to qualifying organizations to develop, expand or maintain an LITC. For every dollar of funding awarded by the IRS, an LITC must have a dollar of match. An LITC must provide services for free or for no more than a nominal fee (except for reimbursement of actual costs incurred).

LITCs ensure the fairness and integrity of the tax system for taxpayers by:

• Providing pro bono representation to assist low-income taxpayers in resolving tax disputes with the IRS;
• Educating taxpayers for whom English is a second language (ESL taxpayers) about their rights and responsibilities as taxpayers; and
• Identifying and advocating on issues that impact these taxpayers.

To achieve maximum access to justice for low-income and ESL taxpayers, the IRS has expanded the eligibility criteria for a grant by removing the requirement for eligible organizations to provide direct controversy representation. Representation may be provided by referring taxpayers to qualified representatives who have agreed to handle the referred cases on a pro bono basis. In addition, pursuant to the ESL Education Pilot Program started in 2023 and continuing for 2024, a grant may be awarded to an organization to operate a program to inform ESL taxpayers about their rights and responsibilities under the IRC without the requirement to also provide tax controversy representation to low-income taxpayers. See IRS Publication 3319 for examples of what constitutes a “clinic.”

Although the amount and timing of 2024 appropriations is not yet known, the President’s 2024 budget request includes a continuation of LITC funding at $26 million and a $200,000 per award funding cap, and funding bills approved by the House and Senate Appropriations Committees contains similar language. Consistent with the Administration’s budget request and House and Senate action to date, the IRS will allow applicants to request grants up to $200,000. If Congress does not continue the LITC Program’s funding at $26 million and/or the increased per award funding cap of $200,000, the IRS will adjust awards to reflect any limitations in place at that time.

Despite the IRS’s efforts to foster parity in availability and accessibility when choosing organizations to receive LITC matching grants, there remain communities that are underserved by clinics. Currently, the states of Hawaii, Kansas, Nevada, North Dakota, South Dakota, West Virginia and the territory of Puerto Rico do not have an LITC. The IRS is particularly interested in receiving supplemental applications from organizations that provide services in these underserved geographic areas. Priority will be given to established organizations that can help provide coverage to underserved geographic areas. For the ESL Education Pilot Program, special consideration will be given to established organizations with existing community partnerships that can deliver services to the target audiences.

The LITC Program is administered by the Office of the Taxpayer Advocate at the IRS, led by National Taxpayer Advocate Erin M. Collins. Although LITCs receive partial funding from the IRS, LITCs, their employees and their volunteers operate independently of the IRS.

Supplemental applications must be submitted electronically by 11:59 p.m. Eastern Time on April 10, 2024. The funding number is TREAS-GRANTS-052024-002. Copies of IRS Publication 3319, 2024 Grant Application Package and GuidelinesPDF, can be downloaded from IRS.gov or ordered by calling 800-TAX-FORM (800-829-3676). To assist organizations in applying for funding, a “Reminders and Tips for Completing Form 13424-M” document is available on the LITC grants page. Questions about the LITC Program or the supplemental grant application process can be addressed to the LITC Program Office by email at litcprogramoffice@irs.gov. Alternatively, you may contact Karen Tober by email at karen.tober@irs.gov.

More information about LITCs and the work they do to represent, educate and advocate on behalf of low-income and ESL taxpayers is available in IRS Publication 5066, LITC Program ReportPDF. A short video about the LITC Program is also available on the IRS website.

Join the LITC Program Office for one of two optional webinars, where it will provide information about the LITC Program and the supplemental application process. Details on the dates and times of the webinars are available at LITC Grants – Taxpayer Advocate Service.

Source: IRS-2024-50, Feb. 26, 2024

During the busiest time of the tax filing season, the Internal Revenue Service kicked off its 2024 Tax Time Guide series to help remind taxpayers of key items they’ll need to file a 2023 tax return.

As part of its four-part, weekly Tax Time Guide series, the IRS continues to provide new and updated resources to help taxpayers file an accurate tax return. Taxpayers can count on IRS.gov for updated resources and tools along with a special free help page available around the clock. Taxpayers are also encouraged to read Publication 17, Your Federal Income Tax (For Individuals) for additional guidance.

Essentials to filing an accurate tax return

The deadline this tax season for filing Form 1040, U.S. Individual Income Tax Return, or 1040-SR, U.S. Tax Return for Seniors, is April 15, 2024. However, those who live in Maine or Massachusetts will have until April 17, 2024, to file due to official holidays observed in those states.

Taxpayers are advised to wait until they receive all their proper tax documents before filing their tax returns. Filing without all the necessary documents could lead to mistakes and potential delays.

It’s important for taxpayers to carefully review their documents for any inaccuracies or missing information. If any issues are found, taxpayers should contact the payer immediately to request a correction or confirm that the payer has their current mailing or email address on file.

Creating an IRS Online Account can provide taxpayers with secure access to information about their federal tax account, including payment history, tax records and other important information.

Having organized tax records can make the process of preparing a complete and accurate tax return easier and may also help taxpayers identify any overlooked deductions or credits.

Taxpayers who have an Individual Taxpayer Identification Number or ITIN may need to renew it if it has expired and is required for a U.S. federal tax return. If an expiring or expired ITIN is not renewed, the IRS can still accept the tax return, but it may result in processing delays or delays in credits owed.

Changes to credits and deductions for tax year 2023

Standard deduction amount increased. For 2023, the standard deduction amount has been increased for all filers. The amounts are:

• Single or married filing separately — $13,850.
• Head of household — $20,800.
• Married filing jointly or qualifying surviving spouse — $27,700.

Additional child tax credit amount increased. The maximum additional child tax credit amount has increased to $1,600 for each qualifying child.

Child tax credit enhancements. Many changes to the Child tax credit (CTC) that had been implemented by the American Rescue Plan Act of 2021 have expired.

However, the IRS continues to closely monitor legislation being considered by Congress affecting the Child Tax Credit. The IRS reminds taxpayers eligible for the Child Tax Credit that they should not wait to file their 2023 tax return this filing season. If Congress changes the CTC guidelines, the IRS will automatically make adjustments for those who have already filed so no additional action will be needed by those eligible taxpayers.

Under current law, for tax year 2023, the following currently apply:

• The enhanced credit allowed for qualifying children under age 6 and children under age 18 has expired. For 2023, the initial amount of the CTC is $2,000 for each qualifying child. The credit amount begins to phase out where AGI income exceeds $200,000 ($400,000 in the case of a joint return). The amount of the CTC that can be claimed as a refundable credit is limited as it was in 2020 except that the maximum ACTC amount for each qualifying child increased to $1,500.
• The increased age allowance for a qualifying child has expired. A child must be under age 17 at the end of 2023 to be a qualifying child.

Changes to the Earned Income Tax Credit (EITC). The enhancements for taxpayers without a qualifying child implemented by the American Rescue Plan Act of 2021 will not apply for tax year 2023. To claim the EITC without a qualifying child in 2023, taxpayers must be at least age 25 but under age 65 at the end of 2023. If a taxpayer is married filing a joint return, one spouse must be at least age 25 but under age 65 at the end of 2023.

Taxpayers may find more information on Child tax credits in the Instructions for Schedule 8812 (Form 1040).

New Clean Vehicle Credit. The credit for new qualified plug-in electric drive motor vehicles has changed. This credit is now known as the Clean Vehicle Credit. The maximum amount of the credit and some of the requirements to claim the credit have changed. The credit is reported on Form 8936, Qualified Plug-In Electric Drive Motor Vehicle Credit, and on Form 1040, Schedule 3.

More information on these and other credit and deduction changes for tax year 2023 may be found in the Publication 17, Your Federal Income Tax (For Individuals), taxpayer guide.

1099-K reporting requirements have not changed for tax year 2023

Following feedback from taxpayers, tax professionals and payment processors, and to reduce taxpayer confusion, the IRS recently released Notice 2023-74 announcing a delay of the new $600 reporting threshold for tax year 2023 on Form 1099-K, Payment Card and Third-Party Network Transactions. The previous reporting thresholds will remain in place for 2023.

The IRS has published a fact sheet with further information to assist taxpayers concerning changes to 1099-K reporting requirements for tax year 2023.

Form 1099-K reporting requirements

Taxpayers who take direct payment by credit, debit or gift cards for selling goods or providing services by customers or clients should get a Form 1099-K from their payment processor or payment settlement entity no matter how many payments they got or how much they were for.

If they used a payment app or online marketplace and received over $20,000 from over 200 transactions,

the payment app or online marketplace is required to send a Form 1099-K. However, they can send a Form 1099-K with lower amounts. Whether or not the taxpayer receives a Form 1099-K, they must still report any income on their tax return.

What’s taxable? It’s the profit from these activities that’s taxable income. The Form 1099-K shows the gross or total amount of payments received. Taxpayers can use it and other records to figure out the actual taxes they owe on any profits. Remember that all income, no matter the amount, is taxable unless the tax law says it isn’t – even if taxpayers don’t get a Form 1099-K.

What’s not taxable? Taxpayers shouldn’t receive a Form 1099-K for personal payments, including money received as a gift and for repayment of shared expenses. That money isn’t taxable. To prevent getting an inaccurate Form 1099-K, note those payments as “personal,” if possible.

Good recordkeeping is key. Be sure to keep good records because it helps when it’s time to file a tax return. It’s a good idea to keep business and personal transactions separate to make it easier to figure out what a taxpayer owes.

For details on what to do if a taxpayer gets a Form 1099-K in error or the information on their form is incorrect, visit IRS.gov/1099k or find frequently asked questions at Form 1099-K FAQs.

Direct File pilot program provides a new option this year for some

The IRS launched the Direct File pilot program during the 2024 tax season. The pilot will give eligible taxpayers an option to prepare and electronically file their 2023 tax returns, for free, directly with the IRS.

The Direct File pilot program will be offered to eligible taxpayers in 12 pilot states who have relatively simple tax returns reporting only certain types of income and claiming limited credits and deductions. The 12 states currently participating in the Direct File pilot program are Arizona, California, Florida, Massachusetts, Nevada, New Hampshire, New York, South Dakota, Tennessee, Texas, Washington state and Wyoming. Taxpayers can check their eligibility at directfile.irs.gov.

The Direct File pilot is currently in the internal testing phase and will be more widely available in mid-March. Taxpayers can get the latest news about the pilot at Direct File pilot news and sign up to be notified when Direct File is open to new users.

Finally, for comprehensive information on all these and other changes for tax year 2023, taxpayers and tax professionals are encouraged to read the Publication 17, Your Federal Income Tax (For Individuals), taxpayer guide, as well as visit other topics of taxpayer interest on IRS.gov.

Source: IRS-2024-45, Feb. 21, 2024

With a key March deadline quickly approaching, the Internal Revenue Service today highlighted special warning signs that an Employee Retention Credit (ERC) claim may be questionable to help small businesses that may need to resolve incorrect claims.

The agency alerted businesses about seven suspicious warning signs that could signal future IRS problems involving ERC claims. The indicators, built on feedback from the tax professional community and IRS compliance personnel, center on misinformation some unscrupulous ERC promoters used. Many of these groups urged taxpayers to ignore advice from trusted tax professionals and claim the pandemic-era credit even though they may not qualify.

“IRS compliance activity continues increasing involving Employee Retention Credit claims, and those claiming this pandemic-era credit need to quickly review their situation to avoid future problems,” said IRS Commissioner Danny Werfel. “Many businesses were wildly misled about the qualifications, and the IRS is taking a special step to highlight common problems being seen about these claims. The IRS urges ERC claimants to get with a trusted tax professional and review their qualifications before time runs out on IRS disclosure and withdrawal programs. The ‘suspicious seven’ signs released today are clear red flags that ERC claimants should carefully review.”

The alert comes as a March 22, 2024, deadline approaches for the ERC Voluntary Disclosure Program for anyone that filed a claim in error and received a payment; the disclosure program allows businesses to repay just 80% of the claim. Taxpayers who filed a claim previously that hasn’t been processed should also review the guidelines and quickly pursue the claim withdrawal process if they now see their claim is ineligible.

The IRS took steps on the ERC program after the well-intentioned pandemic-era program came under aggressive, misleading marketing that oversimplified or misrepresented eligibility rules. Promoters pushed more applicants into the program, frequently by taking a percentage of the payout. The IRS wants businesses to know about these warning signs, revisit their claim if there are questions and act quickly before the special disclosure and withdrawal programs end. Resolving an incorrect claim through the IRS’s special programs will avoid penalties and interest.

“We’ve heard from the tax pro community and others that sharing more warning signs can help point well-intentioned people in the right direction,” Werfel said. “Many of these taxpayers were misled by overzealous and unscrupulous promoters taking advantage of honest taxpayers. The most beneficial time to resolve any incorrect claims is now before this special window closes.”

The ERC, sometimes called the Employee Retention Tax Credit or ERTC, is complex, and the IRS urged claimants to talk to a reputable tax professional for help with an ERC claim. Taxpayers should avoid working with anyone who doesn’t ask for details or business records, such as payroll records.

7 suspicious signs an ERC claim could be incorrect

Here are some of the common red flags being seen on ERC claims that the IRS is focusing on:

• Too many quarters being claimed. Some promoters have urged employers to claim the ERC for all quarters that the credit was available. Qualifying for all quarters is uncommon, and this could be a sign of an incorrect claim. Employers should carefully review their eligibility for each quarter.

• Government orders that don’t qualify. Some promoters have told employers they can claim the ERC if any government order was in place in their area, even if their operations weren’t affected or if they chose to suspend their business operations voluntarily. This is false. To claim the ERC under government order rules:
  • Government orders must have been in effect and the employer’s operations must have been fully or partially suspendedby the government order during the period for which they’re claiming the credit.
  • The government order must be due to the COVID-19 pandemic.
  • The order must be a government order, not guidance, a recommendation or a statement.

    Some promoters suggest that an employer qualifies based on communications from the Occupational Safety and Health Administration (OSHA). This is generally not true. See the ERC FAQ about OSHA communications and the 2023 legal memo on OSHA communicationsPDF for details and examples.

    The frequently asked questions about ERC – Qualifying Government Orders section of IRS.gov has helpful examples. Employers should make sure they have documentation of the government order related to COVID-19 and how and when it suspended their operations. Employers should avoid a promoter that supplies a generic narrative about a government order.

• Too many employees and wrong calculations. Employers should be cautious about claiming the ERC for all wages paid to every employee on their payroll. The law changed throughout 2020 and 2021. There are dollar limits and varying credit amounts, and employers need to meet certain rules for wages to be considered qualified wages, depending on the tax period. The IRS urges employers to carefully review all calculations and to avoid overclaiming the credit, which can happen if an employer erroneously uses the same credit amount across multiple tax periods for each employee. For details about credit amounts, see the Employee Retention Credit – 2020 vs 2021 Comparison Chart.
• Business citing supply chain issues. Qualifying for ERC based on a supply chain disruption is very uncommon. A supply chain disruption by itself doesn’t qualify an employer for ERC. An employer needs to ensure that their supplier’s government order meets the requirements. Employers should carefully review the rules on supply chain issues and examples in the 2023 legal memo on supply chain disruptionsPDF.
• Business claiming ERC for too much of a tax period. It’s possible, but uncommon, for an employer to qualify for ERC for the entire calendar quarter if their business operations were fully or partially suspended due to a government order during a portion of a calendar quarter. A business in this situation can claim ERC only for wages paid during the suspension period, not the whole quarter. Businesses should check their claim for overstated qualifying wages and should keep payroll records that support their claim.
• Business didn’t pay wages or didn’t exist during eligibility period. Employers can only claim ERC for tax periods when they paid wages to employees. Some taxpayers claimed the ERC but records available to the IRS show they didn’t have any employees. Others have claimed ERC for tax periods before they even had an employer identification number with the IRS, meaning the business didn’t exist during the eligibility period. The IRS has started disallowing these claims, and more work continues in this area as well as other aspects of ERC.
• Promoter says there’s nothing to lose. Businesses should be on high alert with any ERC promoter who urged them to claim ERC because they “have nothing to lose.” Businesses that incorrectly claim the ERC risk repayment requirements, penalties, interest, audit and potential expenses of hiring someone to help resolve the incorrect claim, amend previous returns or represent them in an audit.

Resolving incorrect ERC claims

Businesses that are not eligible for ERC but have received it – as a check that’s been cashed or deposited, or in the form of a credit applied to a tax period – may be able to participate in the IRS’s ERC Voluntary Disclosure Program. The special program runs through March 22, 2024, and allows eligible participants to repay their incorrect ERC, minus 20%.

If a taxpayer’s ERC is incorrect and is paid after Dec. 21, 2023, they aren’t eligible for the ERC VDP. They should not cash or deposit their check. They can withdraw the claim, return the check and avoid penalties and interest.

The withdrawal option lets certain employers withdraw their ERC submission and avoid future repayment, interest and penalties. Businesses can use this option if they haven’t received the payment, or they’ve received a check but haven’t deposited or cashed it. If a taxpayer’s withdrawal request is accepted, the IRS will treat the claim as though it was never filed.

Source: IRS-2024-39, Feb. 13, 2024

The Internal Revenue Service today reminded disaster-area taxpayers who received extensions to file their 2022 returns that these returns are due on Feb. 15, 2024.

Eligible taxpayers were those affected by various disasters that occurred between Aug. 8 and Oct. 9, 2023. This included Hurricane Idalia, Hurricane Lee, Tropical Storm Bolaven, the wildfires in Hawaii, the seawater intrusion in Louisiana and storms and flooding in Illinois. For extension filers, payments on these returns were not eligible for the additional time because they were originally due last spring before any of these disasters occurred.

Locations that qualify for the Feb. 15 filing deadline:

• Forty-nine counties in Florida.
• Thirty-two counties In Georgia.
• All of Guam.
• Maui and Hawaii counties in Hawaii.
• Cook County in Illinois.
• Five parishes in Louisiana.
• All 16 counties in Maine.
• All 14 counties in Massachusetts.
• Six islands in the Northern Mariana Islands.
• All 46 counties in South Carolina.

The IRS normally provides relief, including postponing various tax filing and payment deadlines, for any area designated by the Federal Emergency Management Agency (FEMA). As long as their address of record is in a disaster-area locality, individual and business taxpayers automatically get the extra time, without having to ask for it. The current list of eligible localities is always available on the disaster relief page on IRS.gov.

In addition, the IRS will work with any taxpayer who lives outside the disaster area but whose records necessary to meet a deadline occurring during the postponement period are located in the affected area. Taxpayers qualifying for relief who live outside the disaster area need to contact the IRS at 866-562-5227. This also includes workers who assisted with relief activities who are affiliated with a recognized government or philanthropic organization.

Besides those who received extensions to file their 2022 returns, there are other returns, payments and time-sensitive tax-related actions that also qualify for the Feb. 15 deadline. For details, see the IRS disaster relief page, especially the disaster relief announcements for each state and territory.

The tax relief is part of a coordinated federal response to the damage caused by these disasters and is based on local damage assessments by FEMA. For information on disaster recovery, visit disasterassistance.gov.

Source: IRS-2024-29, Jan. 31, 2024