The nine lives of the ERC: The tax credit that keeps coming back!

By Joshua Jenson, CPA, a.k.a. JJ the CPA

Recently the IRS conducted a live nationwide Employee Retention Credit (ERC) webinar, as well as several new announcements about processing and withdrawing ERC claims. I know many CPAs have grown to cringe at the sight of these three letters, E-R-C, and that’s unfortunate because we all know that this is a beautiful tax credit that has provided great financial aid to many employers, not only during the pandemic but for those businesses that survived it.

So, while you may have grown weary when you come across this subject matter, wondering when it will finally die, I am here to share, “Wait, there’s more.” Here is what I will cover:

• IRS suspension on ERC processing is only a temporary delay in processing new claims.
• Employers still have plenty of time to claim ERC for 2020 and 2021, as the three-year statute didn’t start to run until April 15 of the following year.
• The new, specific, and easy IRS procedure to withdraw an ERC claim now exists.

In case you just landed from Mars, here is the ERC in a nutshell: It is an up to $26,000 refundable payroll tax credit, per employee, when totaling the maximum credit of both 2020 and 2021. 

If we melt this down, it’s a simple calculation: Multiply the qualifying wages during the qualifying period by the applicable tax credit percentage depending on the year. A qualifying employer is looking at a tax credit of 50% on qualifying wages in 2020, and 70% of qualifying wages in 2021. While the maximum qualifying wages per employee is $10,000 for all of 2020, it is that same $10,000 maximum in 2021, but for each of the first three quarters in 2021. This leads to a maximum credit of $5,000 per employee in 2020, and $21,000 per employee in 2021. That’s a staggering $26,000 possible refundable tax credit per employee.

To claim the ERC in today’s environment, an employer files a Form 941-X for the applicable quarter in which they qualify, requesting a credit carryover or refund. While there is much more to this, we are now going to jump into hyperdrive and skip to the part where we now have new information.

Has the IRS effectively ended ERC with its recent announcement on the suspension of processing ERC claims?  
The short answer is no. The IRS clearly stated they are simply setting aside new ERC claims on Form 941-X received from Sept. 14, 2023, through Dec. 31, 2023, and will process those starting next year in 2024. The IRS reassured those who have filed an ERC claim before Sept. 14, 2023, that they will continue to process those claims as quickly as they can. At the live webinar, the IRS representatives reiterated these points and encouraged those employers who qualify, that have yet to file for ERC, to feel comfortable still filing Form 941-X.

In fact, they told the audience qualifying employers should not wait until the delay in processing new ERC claims has ended and to file Form 941-X now. Furthermore, the IRS made it clear the three-year statute of limitations will not be extended related to filing Form 941-X as the delay in processing new ERC claims does not preclude the employer from filing Form 941-X.

When will the nine lives of ERC end?
Like anything in the tax world surrounding the claim for a refund from the IRS, the era of the modern-day ERC will end when to applicable statute of limitations ends.

What’s interesting about Form 941-X is that the three-year statute of limitations doesn’t start running until April 15 of the year following the year in which the original Form 941 is applicable. This means that for ERC claims related to the calendar year 2020, the statute of limitations ends on April 15, 2024, and for 2021, it is April 15, 2025. So, we still have quite a bit of time left that this will be on our tax radar.

Quick note, as I personally found this deadline to be a bit of a head-scratcher, you can confirm this for yourself by checking out page six of the most recent IRS instructions to Form 941-X (April 2023) in the section titled “Is there a deadline to filing Form 941-X?” I only share this as traditional tax logic would be defaulting to the statute of limitations starting with the actual due date of each specific Form 941 in any given year, which is the end of the month following the quarter in which Form 941 is reporting wages and related information.

Again, for Form 941, that is not the case as the alternative due date for statute of limitation purposes for all quarters in a calendar year all start to run on April 15 of the year following the reporting year.

The IRS has finally streamlined something with ERC, but only on the side of withdrawing an ERC claim. Most of the IRS nationwide live webinar was dedicated to this withdrawal process. In my opinion, they did an excellent job in going over these procedures.

The long and the short of the withdrawal process is for those who have filed Form 941-X and have either not received a refund or at least not cashed or deposited the refund check, such employers can take advantage of this relatively easy withdrawal process. Now it must be that the employer’s applicable Form 941-X was only to claim ERC and that the entire ERC claim is being withdrawn.

The actual procedure is simple: On a copy of the originally filed Form 941-X the employer writes “withdrawn” on the left margin and on the right margin writes the name of an authorized signer for the business and that person’s title with their signature and date. Next, it is submitted to the IRS.

How this Form 941-X is sent to the IRS depends on which category of these three scenarios the employer falls into.

Scenario 1: If the employer has filed Form 941-X and has not received a refund or notice of audit of the claim, it is faxed to 855-738-7609.

Scenario 2: If the employer has filed Form 941-X and has received notice the ERC claim is under audit, it is either faxed or mailed to the IRS examiner who has communicated directly with the employer. If an IRS examiner has yet to be assigned the employer is to fax or mail it to the number or address indicated on the IRS audit notice. The employer will not fax it to the number indicated in Scenario 1.

Scenario 3: If the employer has filed Form 941-X and has actually received a refund check from the IRS but has not cashed or deposited the check, it is mailed with the check marked “Void” in the endorsement section of the back of the refund check (with a note that says, “ERC Withdrawal”) and mails it only to Cincinnati Refund Inquiry Unit, P.O. Box 145500, Mail Stop 536G, Cincinnati, OH 45250. Along with this, the IRS wants a brief explanation of the reason for returning the refund check.

During the live IRS webinar, several matters related to the withdrawal procedure were made very clear.

The fax number and mailing address provided in the withdrawal procedure are to only be used for withdrawing an ERC claim and should not be used to file an original Form 941-X as anything other than a withdrawn Form 941-X will not be considered or forwarded to the proper IRS department. Also, the effective date of the withdrawal is not when the withdrawn Form 941-X is filed or submitted and is only effective when the IRS accepts the withdrawal indicated by an IRS acceptance letter sent to the employer.

The IRS reserves the right to further investigate the originally filed Form 941-X if filed fraudulently, in which case the withdrawal may be disregarded. It was noted that if the employer has already amended the income tax return to reduce the wages by the previously claimed ERC amount, that original amended income tax return will need to be amended again to claim any applicable income tax refund.

Also, the statute of limitations for filing for an income tax refund is not changed with the ERC withdrawal procedure.

The IRS shared that the webinar will soon be available in the “IRS Videos” section of their website, irs.gov, in the coming weeks for those who missed the live presentation.

If you or your firm decided to not partake in the filing of ERC claims and allowed your client to use a third party, you should not rely on that third party to inform your client of the recent warning announcements by the IRS, let alone the new procedure to withdraw an ERC claim.

I recommend you share this with your client, sooner rather than later, this information regardless of whether you have actual knowledge if they have filed for ERC or not. You could think of it this way, if the IRS comes knocking later, who do you think will be the one called upon by your client to aid in any further IRS inquiries or audits? You guessed it, probably you or your firm. So, consider going on the offense and informing your clients in general of these matters.

So, where do we go from here? 
For any ERC claims yet to be audited, we should ensure our clients are keeping all records and information that lead them to conclude they qualify for ERC and filing Form 941-X. It should be noted that the IRS has applied a five-year statute of limitations on any ERC claims applicable to the third and fourth quarters of 2021. Also, the statute of limitations for all other claims starts to run on the date the employer filed for ERC.

Personally, I don’t believe our clients have anything ever worry about when it comes to IRS audits, whether for ERC or otherwise, if a proper position was reasonably and legally taken on any matter as well as proper and complete documentation being readily available to the IRS. We should keep in mind, that the IRS will only hold the employer responsible for any tax adjustments including penalties and interest, as the IRS does not allow a taxpayer to only rely on the advice of a third party, especially if that advice is from a party that is not a tax adviser at all and simply a “marketing genius.” With that being said, ensure your client’s files are complete, now.  Lastly, don’t forget to bill your client for all your time involved, regardless of whether you assisted in the filing for ERC.

Joshua Jenson, CPA, has more than 30 years of public accounting experience bringing daily videos and value to his 81,000+ subscribers on YouTube where he has amassed more than 6,600,000 views. He has authored two books and traveled to more than 50 cities presenting tax courses to thousands of fellow CPAs, covering the latest tax laws and strategies. Jenson founded his own CPA firm at age 25 and still serves and advises his private clients daily. He also manages his life and disability income insurance practice, Jenson Insurance.