Pandemic Tax Break: Refunds, Upcoming IRS Guidance Explained

The IRS is giving employers a second chance to come forward for erroneous pandemic-era tax credit claims at the same time the agency is shifting to aggressively go after third-party fraudsters gaming the program with more guidance expected in 2024.

The refundable employee retention tax credit was created during the pandemic to keep struggling businesses afloat and help encourage employers to keep workers on the payroll.

But after Congress created it in 2020, bad actors swarmed the space. Now, the newly funded IRS finally has the resources to go after these third-party promoters who pushed overstated and fraudulent claims, and in a major step in September, the IRS paused the processing of new claims until at least the end of 2023.

Since the start of the new initiative, the IRS has sent out over 40,000 letters either turning down claims that didn’t meet the basic requirements to get the refund or with proposed tax adjustments to recapture the erroneously claimed ERC.

The IRS hasn’t said yet when the moratorium will be lifted but will give an update in the coming year.

Here’s what these changes mean for your refund.

1. I already filed a legitimate claim. What’s next?

The IRS said it will continue to process claims made before the pause but at a much slower rate. The goal for processing existing claims will be 180 days—double the time from the previous goal of 90 days.

But if the agency doesn’t take action within six months after a business claimed the credit, employers can file a lawsuit in a US District Court or the US Court of Federal Claims to make sure they get their refund.

Though the costs to sue can be considerable, it’s an attractive option for big claims.

Depending on when they filed the claim, an employer can receive up to $26,000 per employee if they were forced to shut down during the pandemic, had a decline in gross receipts, or qualified as a recovery startup business.

Eligible employers can claim the credit for wages paid between March 13, 2020, and Dec. 31, 2021. Those who didn’t claim the credit on their return can file an amended return up to three years after the original return was filed.

2. Should I still submit an eligible claim?

The clock is ticking as the deadline to submit amended returns approaches. Taxpayers have until April 15, 2024, to amend 2020 returns and until April 15, 2025, to amend returns for 2021.

Since it’s still unknown when the moratorium will lift, employers who are confident they qualify should still file claims even though there is a pause in processing.

3. I filed a refund claim, but can I take it back?

The IRS started accepting requests to withdraw claims in October for employers who wanted to avoid future repayment, interest, and penalties. The agency already has received over $100 million in withdrawals since the relief option was offered.

This option is for taxpayers who unknowingly filed an incorrect claim. Employers can qualify for the withdrawal process if they made a claim on an adjusted employment return, filed the adjusted return only to claim the credit and didn’t make other adjustments, want to withdraw the entire claim amount and weren’t paid the refund, or didn’t cash the IRS check.

Withdrawn claims will be treated as though they were never filed.

4. What happens if I already received cash for my erroneous refund?

Employers will only have to pay back 80% of the tax credit they claimed if they come forward to the IRS before March 22, 2024, and choose to participate in the voluntary disclosure program.

They will have to trade in information on the advisers and preparers helping them file their claim.

For employers who go through a third party for payroll, that third-party company will have to file the form for the program. Only businesses that haven’t been contacted yet by the IRS are eligible.

Read more:

• Make Covid Credit Claims Even During IRS Pause, Tax Pros Say
• IRS Stops New Pandemic-era Tax Credit Claims to Curb Scams (1)
• Employee Retention Credit Claims Added to IRS Tax Scam List
• IRS Letters to Disallow Ineligible Covid-Era Tax Credit Claims
• Employers Can Begin Withdrawing Pandemic-Era Tax Credit Claims
• Employee Retention Credit Guidance Coming in Weeks, Werfel Says
• IRS Unveils Settlement Program for Improper Covid Credits (1)