Thought Leadership by Ian Williams, Principal | KBKG

The Employee Retention Tax Credit (ERC or ERTC) continues to be a top issue for the IRS and Congress, as more than one million ERC claims remain unprocessed. Below are 5 important items for taxpayers and tax professionals to consider after recent IRS updates:

1. IRS Notices – Disallowance Letter (105C) Guidance

As mentioned in KBKG’s previous blog post, the IRS has recently increased its ERC processing activity and has begun sending out a variety of notices and refund checks. The most concerning of these notices is a full disallowance (105C) letter, which was initially sent out with limited and inconsistent guidance. The IRS recently published much needed additional details on these 105C letters to help taxpayers understand how to respond to these notices and what the appeals process will entail. In the article, the IRS recommend the following:

    • Importance of a dispute being filed within 30 days where possible to protect the two-year timeline to request an appeal or file suit
    • Re-check eligibility before responding
    • If you still believe you qualify, guidance for what documentation to include in the response
    • How to request an appeal or file suit
    • Outlining the timeframe: two years from the date of the disallowance letter to settle the dispute

2. ERTC Repeal Act (January 31, 2024 Proposed Termination) Introduced in Senate

A bipartisan Employee Retention Tax Credit Repeal Act was introduced into the Senate last month. The bill would repeal the credit for any claims made after January 31, 2024, while expanding penalties for fraudulent claims and providers. Earlier this year, a similar policy was introduced in a bill that passed the House, but stalled in the Senate. Much of that bill would have been paid for by the early termination of ERC, and the IRS has since made numerous requests of Congress to terminate ERC as a separate provision. Currently, the filing statute for 2021 ERC filings remains open until April 15, 2025, but claims made after January 31, 2024 continue to be part of the IRS processing moratorium and we expect that to continue at least until this bill is addressed in Congress.

3. Second Round of Voluntary Disclosure Program (VDP)

    • Open for 2021 ERC claims only, available through November 22, 2024
    • Applicable only to full ERC withdrawals where refund check has been deposited. Partial adjustments need to be made through amended payroll tax returns
    • Corrects improper payments at a 15% discount, avoids future audits, penalties and interest
    • Withdraw program still available for all periods if a refund hasn’t been received or if the check hasn’t been cashed
    • Filings made through a third-party payer (PEO) have to be handled by the third-party payer

4. Reminder Tax Implications of ERC Refunds and Interest

ERC refund checks include the total refund applied for, plus interest, less any adjustments made by the IRS for taxes due on the account or calculation errors. KBKG wrote an article here on the presentation of these items on the Notice CP210 or the refund check.

The taxability of the ERC refund claim (separate from the interest income) is handled via amended income tax returns for the applicable tax year of the ERC claim. For example, a 2020 amended income tax return is required to report additional income for the total amount of ERC claimed associated with 2020 periods, and a 2021 amended return for any 2021 ERC claims. The IRS has not published guidance for how to handle this taxable income if the amended income tax return was not filed prior to the statute expiring.

The interest income received, however, is taxable in the year the refund check is received. Given the excessive processing time for most ERC claims, the amount of interest received can be significant and should be factored into your current taxable income.

5. Beware of Scammers

With the IRS announcement of IRS disallowance letters, there has been an uptick in letters from ERC mills that look very similar to official IRS notices. As a reminder, official IRS notices will be from the IRS (top left of the notice) and will reference a specific Notice number (top right of the notice). The IRS website recommends searching for specific notice here. If a specific notice isn’t found on the website, call 800-820-1040 and follow the IRS representative’s instructions to confirm whether it is an official notice.

Conclusion:

KBKG recommends taxpayers with outstanding refund claims to diligently check their mail for (1) refund checks and (2) IRS Notices or Disallowance (105C) Letters. As with all IRS communications, time is of the essence, so consult a tax professional immediately to ensure that valid claims are supported on a timely basis.

If taxpayers have outstanding claims and did not meet the eligibility requirements, consult with a tax professional and review the ERC Withdrawal Program or the Voluntary Disclosure Program to avoid future compliance issues.

Action Steps:

For years, KBKG has been at the forefront of specialized tax programs like ERC, having established itself as an industry leader in areas such as the Research & Development Tax Credit, 179D Tax Deduction, and Cost Segregation, along with other tax incentives.

These value-added solutions are why CPAs and businesses have continually trusted KBKG’s expertise and service. Contact KBKG today to see which services and solutions you can benefit from.

Ian Williams | Principal – Research and Development Tax Credit Services

Ian Williams is a Principal for KBKG, specializing in Research & Development Tax Credits and Employee Retention Credits. Ian spent eleven years at a Big Four accounting firm specializing in R&D tax credits and fixed asset studies across a variety of industries. He has extensive experience in. Read More