The Employee Retention Tax Credit (“ERTC”) is a valuable employment tax credit (currently worth up to $26,000 per employee for 2020/2021) enacted as part of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act in 2020.[i] Employers still have time to take advantage of the ERTC for qualifying quarters in 2020 and 2021, as amended returns may be filed up to three years from the date of the original tax return.
At the same time, qualification rules are complex, and we have seen instances of companies promoting the credit that have inappropriately advised clients on the ERC rules. As we wrote about in March of 2021, IRS Notice 2021-20 provides extensive guidance that should be carefully examined prior to filing, as well as additional guidance issued by the IRS on the ERTC.
While the credit is valuable to qualifying employers, Congress has also sought to ensure the recovery of improper credits taken by non-qualifying employers by extending the IRS’ assessment period for certain quarters in 2021 to five years.[ii] In addition, the IRS has issued temporary and proposed regulations which enhance its ability to recapture erroneous refunds.[iii]
During the audit process, the IRS has a number of tools at its disposal, including the potential assessment of interest and penalties, which can be substantial. Moreover, employers filing amended returns must certify, subject to applicable criminal law provisions, that their filing is true, correct, and complete.
[i] Pub. L. No. 116-136, 134 Stat. 281, enacted March 27, 2020. Modified and extended by the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Division EE, Consolidated Appropriations Act, 2021, Pub. L. No. 116-260, 134 Stat. 1182 at Sections 206-207) (December 27, 2020), Section 9651 of the American Rescue Plan Act of 2021, Pub. L. No. 117-2, 135 Stat. 4 (March 11, 2021), and Section 80604 of the Infrastructure Investment and Jobs Act, Pub. L. No. 117-58, 135 Stat. 429 (November 15, 2021).
[ii] American Rescue Plan Act of 2021, Pub. L. No. 117-2, 135 Stat. 4 (March 11, 2021).
[iii] Temporary and Proposed Regulations (T.D. 9904; REG-111879-20); Temporary and Proposed Regulations (T.D. 9953; REG-109077-21).