Amended Tax Return Requirements
The ERC program was set up with a requirement that taxpayers amend the original tax return to ensure taxpayers weren’t claiming deductions and refundable credits on the same wages. Specifically, 2020 ERC claims require an amended 2020 corporate tax return to reduce the salary and wage deductions by the total amount of credits claimed associated with 2020 quarters. The same requirement exists for 2021 tax returns related to 2021 ERC claims.

The combination of the backlog in IRS processing and the upcoming statutes expiring on 2020 returns creates a potentially unfavorable scenario for taxpayers, described below.

Scenario: Under current law, if the IRS denies ERC credits after the 2020 corporate tax return statute expires, there is no method for recovering the lost wage deductions. There is language in the pending H.R.7024 legislation (Tax Relief for American Families and Workers Act of 2024) that would extend the statute for those amended returns and alleviate this problem, but there is not certainty of whether that bill will be signed or whether that language will be included in future bills. Based on current law, the only method to protect these deductions would be the following steps:

1. File an amended 2020 tax return to reduce wage deductions by the amount of the credit.
2. File a concurrent protective refund claim to reinstate the wage expense deduction if the ERC claim is denied by the IRS.

While this is a cautionary measure, we recommend taxpayers consult with their Tax Preparers to determine if this approach is right for them.

ERC Processing Timing Update from the IRS
The IRS national taxpayer advocate provided an update on timing on a recent AICPA webinar:

Pre-moratorium filings (ERC claims postmarked before 9/14/2023) – The IRS is continuing to process these, but payouts are very slow. They did not provide an estimated date for clearing their backlog.

Post-moratorium filings (ERC claims postmarked on or after 9/14/2023) – The IRS doesn’t expect to get any of these 941-X forms until after tax filing season.

KBKG Insight:

While ERC processing was often taking at least 6 months before the moratorium, we have seen many cases with up to a year or more in processing time since the moratorium began. We expect the IRS to provide an update on the official end of the moratorium at which point they will hopefully provide another update on processing timing.