Whatchamacolumn: IRS auditors track ineligible tax claims

Many employers, perhaps unsuspectingly, are walking through financial minefields of their own making.

Nationwide, 3.6 million businesses and organizations have filed claims for IRS “Employee Retention Credits” (ERC). Employers became eligible for substantial payments if their 2020 gross revenues dropped 50-plus percent below 2019 numbers, and/or if their 2021 revenues dropped 20-plus percent below 2019. In either case, IRS payouts depended on how many employees were retained during those hard times, plus other factors.

It was complex, but relatively straight-forward. However, eligibility also extended to employers for limited time periods when their operations were fully or partially closed down by formal government orders related to the COVID-19 pandemic. Misreadings of that condition — some by mistake, some by fraudulent intent — have triggered widespread audits and prosecution by aggressive IRS officers.

The available pot of gold was huge. Many employers qualified for and claimed legal payments, but many others ignored the fine print rules and fell prey to unscrupulous “consultants” who promised them hundreds of thousands or millions of dollars in IRS payments.

“Our services are free if you don’t get paid,” they said, “and then we only take 20 percent of what you get.”

Over time, we received many dozens of offers from those “experts” via email and phone calls. Our company did, in fact, qualify for 2021 ERC benefits after careful vetting by our CPA and our own common sense. Others were not so careful, and IRS auditors are on their trail.

At a minimum, successful IRS prosecution requires full payback of ERC received, including the 20 percent commission that may have disappeared. Plus interest and penalties. And for clear cases of fraud by employers or their advisors, it can mean criminal charges.

Not surprisingly, the IRS has suspended processing of all new ERC claims. And now, there’s a new wrinkle that can add insult to injury for wrongful claims.

ERC payouts generally required filing amended IRS payroll reports for 2020 and/or 2021 — a process allowed for up to three years and ending on Dec. 31 for 2020 reports. However, ERC money is taxable income to employers, and income tax returns can only be amended for three years. So, the IRS can continue to audit amended payroll reports with ERC claims for two more years beyond the statute of limitation for refunding the related income taxes that should have been paid on the ERC.

Some predict that IRS audits and prosecution of ERC claims will redouble in 2024-25 because it will be too late for offenders to recover those 2020-21 income taxes. In that case, a provision of the pandemic legislation intended to support small businesses could become a revenue-raiser for the federal government.

Many employers should get new advice, voluntarily return ineligible ERC funds, and at least recoup the taxes they paid on that money. 

Jeb Bladine can be reached at jbladine@newsregister.com or 503-687-1223.