Claudia Vasquez, J.D. helps explain the possible impact of proposed legislation on the Employee Retention Credit.
Azarvand Tax Law
In a move that’s cutting deep, U.S. Senators Mitt Romney (R-UT), Thom Tillis (R-NC), and Joe Manchin (I-WV) have introduced the Employee Retention Tax Credit Repeal Act of 2024 (the ERC Repeal Act). The legislation seeks to retroactively end the Employee Retention Tax Credit (ERC) for claims filed after January 31, 2024, and will impose heightened penalties for fraudulent ERC claims.
Senator Romney, speaking on the issue, stated: “In a rare moment of widespread agreement in Washington, almost all members of Congress agree that we should eliminate the ERC—which has been pervaded by fraud and cost nearly 200% more than originally projected,”
As it stands, the deadline for 2021 ERC claims is April 15, 2025. The 2020 ERC deadline was April 15, 2024. The ERC Repeal Act proposes retroactively ending ERC filings postmarked after January 31, 2024, affecting both 2020 and 2021 ERC filings.
The ERC was designed as part of the CARES Act in 2020 to help businesses retain their employees during the economic uncertainty caused by the pandemic. By offering a refundable credit based on qualified wages paid during the pandemic, the ERC aimed to reduce layoffs and keep businesses afloat during mandated shutdowns and fluctuating customer demand.
Why Is the ERC Being Repealed?
Despite its initial intentions, the ERC has come under fire for fraud and ballooning costs. Estimates suggest that the program has added $230 billion to the national debt through Fiscal Year 2023 and could cost up to $550 billion if left unaddressed. Fraudulent claims have plagued the program, with the Internal Revenue Service (IRS) reporting that up to 20% of claims submitted show "clear signs of being erroneous," and as many as 70% pose an "unacceptable risk" of being improper.
Promoters of ERC claims—often third-party entities charging exorbitant percentage-based fees—have also contributed to the problem. These promoters have used aggressive marketing tactics to convince small business owners to file claims on their behalf, often without fully understanding eligibility requirements or the risks involved.
In light of these issues, legislators believe the ERC has served its purpose and should be phased out to prevent further financial strain and fraud. The proposed bill would retroactively disallow any ERC claims filed after January 31, 2024, and increase penalties for fraudulent claims under review.
How Will the ERC Repeal Act Impact Business Owners?
The repeal of the ERC will have significant implications for business owners who have benefited from the credit or were planning to file for it. Here's how different groups within the salon industry may be affected:
- Business Owners Who Have Already Filed Claims and Have Not Received Their Refund(s)
- Business Owners Who Have Already Filed Claims and Have Received Their Refund(s)
- Business Owners Who Haven’t Filed Yet
The IRS continues to process returns claiming ERC that were postmarked by January 31, 2024. The ERC Repeal Act will not impact those claims but proposes ending all claims filed after that date. Business owners should also be mindful that they will likely need to wait at least a year, or even two before their ERC refunds are issued due to the slow processing times.
There is one silver lining, though - the ERC refunds are issued with interest, and the current interest rate is 8% APR, providing an extra cushion of funds for business owners who prevailed through COVID.
Given the complexity of the ERC program and the potential for significant financial implications, seeking a second opinion from a qualified tax professional is crucial. This is especially important if you've worked with a third-party ERC promoter or if you're unsure about your claim's legitimacy. A second opinion can help validate your claim's accuracy, identify potential issues, and provide peace of mind. It can also help you prepare for possible scrutiny from the IRS, which is increasingly likely given the proposed legislation.
Business owners should also be aware of the possibility of receiving ERC refund disallowance letters from the IRS. These letters indicate that the IRS has reviewed your claim and found it to be ineligible for the credit. If you receive such a letter, it's essential to act quickly and seek professional assistance, as you only have thirty (30) days from the date of the letter to respond.
In the event of a disallowance, having thorough documentation to support your claim becomes crucial. This can include but is not limited to, records of how your business was impacted by the pandemic, applicable government orders, and detailed financial records, such as payroll reports or profit & loss statements.
If you have already filed your ERC claim(s) and have received your refund(s), you might think you are in the clear, but don’t let your guard down just yet. The IRS will be on high alert for any fraudulent claims, and even legitimate filings might get caught in a tangle of disallowances or audits. It is essential to review the filing details, especially if you did not work with a trusted tax professional. Some promoters took aggressive liberties and even submitted fraudulent claims on behalf of businesses, sometimes without fully explaining the risks, often incentivized by percentage-based fees.
With the ERC under heightened scrutiny, some business owners may find the risk associated with their filing not worth the potential gains. If you feel uneasy about your claim, it may be best to consider the ERC Voluntary Disclosure Program (VDP). This program offers a way to withdraw your claim, potentially avoiding audits or claim disallowance risks, and allowing you to focus your energy on running your business. It's a proactive step that can provide peace of mind and a clear path forward.
A process is in place to apply for the program, including repaying 85% of the funds received (and keeping the other 15%) and cooperating with requests for information from the IRS. During the initial VDP, these requests included information on the individuals or third parties preparing the ERC submission.
If you suspect that your claim may have been improperly filed, it's important to take action. Consulting with a tax professional can help you navigate next steps and minimize potential penalties. If eligible for the second round of VDP, your business gets to keep 15% of the funds received while potentially avoiding future audits, penalties, and interest. It is important to note that the second round of VDP only runs through November 22, 2024.
Given the proposed retroactive deadline of January 31, 2024, business owners should hold any new ERC claims until the bill's outcome is determined. In January 2024, the House of Representatives introduced a bill that set a potential deadline of January 31, 2024. While this bill did not pass, its similarity to current proposals in the Senate indicates a strong bipartisan effort to conclude ERC and COVID-era funding.
Filing after the proposed deadline risks rejection of your claim and may leave you liable for payment to your preparer, regardless of the outcome. This means that even if your claim is denied, you could still incur costs without any financial return.
The Legislative Process: From Bill to Law
The journey of the ERC Repeal Act from a proposed bill to potentially becoming law involves several key steps. After being introduced in the Senate, the bill will be referred to the appropriate committee (e.g., the Finance Committee). If approved by the committee, it will be reported to the full Senate for debate and voting. If passed, the bill will move to the House of Representatives for a similar process of committee review and floor debate.
Once both chambers pass identical versions of the bill (potentially involving a conference committee to reconcile differences), it goes to the President, who can sign it into law, veto it, or take no action (in which case it becomes law after ten (10) days, excluding Sundays, unless Congress adjourns). This process can take a few weeks to several months, depending on the priority level and controversy surrounding the bill. Given the bipartisan support for addressing ERC fraud and the potential budget implications, this bill might move relatively quickly through the process.
What’s Next
While the repeal of the ERC may seem like a sudden and harsh shift, it is reflective of the broader effort by lawmakers to curb the growing national debt and prevent further abuse of pandemic-era relief programs. For business owners, the elimination of the ERC may necessitate a shift in financial planning, especially for those who were relying on the credit to cover wages or other business expenses.
While the future of the ERC may be a little fuzzy, keeping informed and working with trusted advisors will help you avoid any tangles down the road. As this new bill works its way through Congress, business owners should take the opportunity to review their finances and find new ways to keep their chairs full and clients looking fabulous. Just like any great style, a bit of flexibility and adaptation will ensure you keep your business looking its best—no matter what cuts Congress throws your way.
It is always advisable to consult with tax professionals who can provide personalized advice based on your specific circumstances related to the ERC. Email Azarvand Tax Law at Info@AzarvandTaxLaw.com or go online to ERCAuditTaxAttorneys.com to book a free thirty (30) minute consultation.