Treasury and the Internal Revenue Service (IRS) have announced increased enforcement in connection with employee retention tax credit (ERTC) claims. The agencies are warning about more scrutiny as a result of what they call massive fraud in the pandemic-era tax rule. Now, some in Congress are pushing back, concerned that legitimate claims are not being paid as a result of this increased scrutiny. In addition, Congressional tax writers are looking at the ERTC as a possible source of offsetting revenue for the emerging tax bill (see story below).
There is widespread agreement among lawmakers from both parties and in both chambers that there is rampant fraud in the ERTC claims arena. However, there is also considerable concern about legitimate ERTC claims that are caught up in the crack-down against fraud. There is also considerable interest in using revenue from changes in the ERTC to offset the cost of new tax legislation. Tax-writing committee Chairs Smith (R-MO) and Wyden (D-OR) have unveiled legislation that would cut back and end the program to fund a bipartisan, bicameral “tax framework” agreement called The Tax Relief for American Families and Workers Act of 2024 (see dissuasion of this bill below).
Hill insiders acknowledge that tax technicians are taking a close look at the ERTC rules, both to protect legitimate claims and to raise revenue. However, they report considerable difficulty in finding a way that would address fraudulent claims without imposing retroactive rules and without adversely impacting those employers that are making legitimate ERTC claims. So far, this is still very much a work in progress.
The ERTC allowed employers to take credit against the payroll taxes they owed during the pandemic. The credit expired two years ago, but there is “a mountain,” tax experts say, of claims being made via amended returns, and claims not yet processed by the IRS. The latest information suggests that some $230 billion in ERTC claims has already been paid. More than $100 billion of that was disbursed in 2023. Currently there are more than 300 claims under criminal investigation, worth some $3 billion in claims. Many NAIFA members and their clients have made or are considering making ERTC claims.
The IRS also has announced a “deal” under which employers that have not yet been audited who think they may have made an ERTC claim that is not valid could repay 80 percent of the amount they received. IRS Commissioner Danny Werfel said this is not only a big discount, but also a much better deal than will be available if the employer is audited and found to have received the ERTC in error (or fraudulently). “They (employers) will not get a better deal later,” Werfel said.
Among the legislative possibilities under consideration are an extension of the three-year statute of limitations to allow the IRS more time to investigate potential fraudulent ERTC claims, a rule that would exempt smaller ERTC claims from criminal investigation and making ERTC promoters a target for prosecution under the tax shelter rules. Commissioner Werfel has suggested three proposals: extending the statute of limitations to investigate questionable ERC claims to five years from three years; prohibiting so-called contingency fees that promoters charge when marketing credit claims; and granting the IRS authority to issue penalties against preparers in the context of ERC claims.
Prospects: Opposition to changes in the ERTC rules (that would narrow the tax credit’s availability) is expected both from the business community and from lawmakers who sympathize with businesses with legitimate ERTC claims that are now caught in this crossfire. Add in the difficulty tax technicians are having in rewriting the rules in a way that avoids retroactive impact on “innocent” ERTC claimants and chances diminish for legislative change to the now-expired ERTC. However, the need for revenue and the deficit that now tops $2 trillion make the ERTC a really tempting target. Those who have ERTC claims pending or are considering amending their 2020-2021 tax returns to make an ERTC claim, should proceed with extreme caution.
NAIFA Staff Contact: Jayne Fitzgerald – Director – Government Relations, at jfitzgerald@naifa.org.