The COVID-19 pandemic impacted nearly everyone running a business or nonprofit organization in 2020 and 2021. In response, the federal government enacted the CARES Act in March 2020 to help incentivize businesses and nonprofits to keep employees on the payroll as commerce slowed or shut down altogether. The act included a refundable payroll tax credit called the employee retention credit or ERC. Many businesses and nonprofits claimed the ERC, some on their original federal employment tax returns for 2020 and 2021, others by filing an amended return later.
Many businesses that filed amended returns to claim the ERC got an unwelcome surprise, however, when the IRS held up processing their refund claims. This was largely the result of a flood of claims generated by folks ranging from well-meaning advisors who made an honest mistake to promoters engaged in high-volume fraud. Meanwhile, many businesses that filed legitimate, well-supported claims are still waiting for the IRS to process them. As economic uncertainty increases, many are wondering if there's anything they can do to speed up the process and get the IRS to release the money they're owed.
Unfortunately, the answer to that question is more complicated than it should be. With staffing cuts at the IRS, it's harder every day to reach anyone there who can help. Some taxpayers have gotten good results by contacting their congressional representative or U.S. senator. Their staffs don't charge anything for providing this constituent service, and they can sometimes help get the process moving.
Contacting elected representatives may not immediately or fully resolve the issue so taxpayers might have to take additional actions to preserve their appeal rights.
Additionally, taxpayers should be sure they understand their situation and their options before getting elected representatives involved. For example, ERC claims based on a significant decline in gross receipts may be less likely to be denied than claims based on full or partial suspension of business activity, which the IRS may view as more subjective and prone to abuse.
Roughly speaking, ERC claims can be sorted into three buckets.
Bucket No. 1 – Illegitimate Claims
The first bucket consists of illegitimate claims, many of which resulted from bad advice the taxpayer received. If a taxpayer's claim is one of those, the taxpayer should consider whether it makes sense to withdraw the claim.
The reason is that if the IRS ultimately determines the claim is suspicious, the IRS can launch an audit for the tax year(s) involved. Not only is an audit costly and time-consuming, but it can also open the door for the IRS to look at issues beyond the ERC claim. If the taxpayer took other positions on its returns for those years that the IRS could challenge, this may be a concern.
An experienced attorney can help evaluate a taxpayer's claim and manage risks that can arise in the withdrawal process.
Bucket No. 2 – Legitimate Claims with No Concerns
The second bucket consists of well founded, fully substantiated claims for years where the taxpayer has no concerns about other, non-ERC positions it took on its federal tax returns. Typically, it won't make sense for a taxpayer to withdraw this type of claim.
Instead, a taxpayer with one of these claims may want to consider trying to speed up the process. Depending on the amount of the ERC claim and other factors, one option is to engage an attorney to file a refund lawsuit in federal district court or the Court of Federal Claims. This option is available if the IRS has been sitting on the refund claim for at least six months without issuing a determination.
Traditionally, these cases were handled for the government by attorneys from the Tax Division at the U.S. Department of Justice who were experienced in federal tax cases. These attorneys would usually recognize fairly quickly when a taxpayer's case was straightforward and should be settled, and they would try to resolve these cases in a matter of months. But recent personnel cuts and other changes at DOJ's Tax Division may increase delays there as well, making it more important to have an experienced attorney representing the taxpayer.
Bucket No. 3 – Legitimate Claims, with Some Concerns
The third bucket of ERC claims consists of legitimate, fully substantiated claims, but for tax years where the taxpayer has other concerns about its federal tax returns. Maybe the taxpayer took another position on its return for those years that the IRS could challenge, and now the taxpayer is not sure whether it should risk opening that can of worms. Depending on the amounts attributable to the ERC claim versus the other issue, as well as other factors, a taxpayer with a claim in this bucket will want to consider its options carefully.
If a taxpayer filed a legitimate ERC claim but had help from a consultant that the IRS views as responsible for invalid ERC claims filed by other taxpayers, the IRS could take a closer look at the taxpayer's ERC claim for that reason alone.
Other Obstacles and Opportunities
If a taxpayer decides to wait for the IRS to make a decision and the IRS ultimately denies the taxpayer's ERC claim, the taxpayer should have the opportunity to pursue an administrative appeal with the IRS Independent Office of Appeals. Like litigation, that process will probably take more than six months, and possibly more than a year, to achieve final resolution. And if the appeal takes too long, the taxpayer can lose its opportunity to file a refund lawsuit unless the office signs a written agreement to extend the two-year statute of limitations. Getting help from an experienced attorney can ensure the taxpayer's claim receives the consideration it deserves.
If the business or nonprofit has shut down by the time the IRS issues its decision with respect to the ERC, it is important that the IRS have a valid address on file for the taxpayer's successor or representative. Otherwise, the taxpayer may not receive the IRS's written determination and may lose its right to appeal. In addition to providing a valid mailing address on the business's final tax return, one way for the taxpayer to increase the chances that someone actually receives the notice is to designate one or more representatives to receive copies of notices related to the tax year(s) for which the ERC claim was filed. These representatives can be attorneys, accountants, officers, owners, or all of the above.
Finally, businesses and nonprofits that use professional employer organizations or PEOs may need to be particularly careful about following the correct process to claim the ERC. Some taxpayers who use PEOs have run into an issue where they may not be able to claim their own credit or manage their own refund claim because the claim may technically belong to the PEO, which is the employer of record for the taxpayer's personnel.
These are just a few of the factors to consider when deciding whether to try to expedite IRS consideration of ERC claims. If there are questions, Taft's experienced team is available to help.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.