IRS establishes procedures for third-party payors to withdraw credit claims due to inadequate employee retention

The IRS is not relenting in its efforts to stem the tide of what it believes are erroneous or false Employee Retention Claim (ERC) claims. The agency has now announced that it is opening a supplemental claims process to help third-party payers and their customers resolve false ERC claims.

The problem

Third-party payers, such as payroll companies, report and pay their customers' federal payroll taxes under the third-party payer's employer identification number (EIN). Some of these third-party payers also submitted ERC claims on behalf of multiple employers. If a third-party payer's customer has since determined that they are not eligible for the ERC and wishes to resolve their claim, the third-party payer must correct this.

You see where this is going. Previously, it was unclear how a third-party payer that submitted ERC claims for multiple employers could easily correct claims for some companies while allowing other claims to be processed. Now the IRS has implemented a “supplemental claims process” that allows a third-party payer that has previously filed a claim with multiple customers to withdraw claims for some customers while maintaining the claims of eligible customers.

The solution

The Supplemental Claims Process allows third parties to correct or consolidate prior claims filed on or before January 31, 2024 if the IRS has not yet processed those claims – the third party payer should not include ERC amounts filed after January 31, 2024. Once the supplemental claim is filed, the IRS will no longer process the outstanding adjusted employment tax returns for the tax period and will treat claims filed before the supplemental claim as if they had never been filed.

(And this is not a request to claim more credit. According to the IRS, the ERC amount for the supplemental claim must be equal to or less than the cumulative ERC amount claimed for the refunds that the third-party payer is replacing with filing the supplemental claim. )

The deadline to submit a supplemental application is November 22, 2024. There are no extensions.

“The Supplemental Application Program is a critical step in improving the IRS’s ability to process employee retention credit applications for this more complex segment of taxpayers,” said IRS Commissioner Danny Werfel. “As we continue to accelerate and intensify our work in this area to help small businesses qualify and protect ourselves from improper claims, we continue to explore and develop additional opportunities to accelerate our work on this incredibly detailed loan where the Number of claims exploded after aggressive marketing.”

Eligibility

The supplemental claims process is aimed at third-party payers who meet all criteria. To qualify, the third-party payor must have filed one or more claims summarizing employee stock ownership credits on an amended employment tax return (Forms 941-X, 943-X, 944-X, or CT-1X) using the third-party payer's EIN. Importantly, the IRS has not processed any of the claims that the third-party payor includes in the supplemental claim.

Other options

The supplemental claims process does not apply to common law employers who did not use a third-party payer and instead filed amended employment tax returns using their own EIN. This also does not apply to third-party payers who have received the entire ERC amount they claimed on behalf of their clients and their clients as a refund or credit against taxes owed.

Third-party payers and employers who do not qualify for the supplemental claims process may have other options for resolving frivolous claims, including voluntary disclosure.

The IRS has launched a second ERC voluntary disclosure program for companies that want to repay the money they received after erroneously filing ERC claims. This program applies only to 2021 tax periods – you cannot use this version of the voluntary disclosure program to repay 2020 ERC funds. Specifically, in the second version of the program, taxpayers can only resolve payroll tax returns for tax periods ending March 31, 2021, June 30, 2021, September 30, 2021, and December 31, 2021.

If you join the new program version, you will have to pay back 85% of the credit you received. If you are unable to repay the required 85% of the loan when you sign your closing agreement, you may be considered for an installment agreement (this will be done on a case-by-case basis).

The IRS does not charge interest or penalties on loans that you pay back promptly. However, if you are unable to repay the loan when you sign your closing agreement, you will be required to pay penalties and interest under an alternative payment arrangement – including an installment agreement.

And as before, if the IRS paid interest on your ERC refund claim, you do not have to pay back that interest.

To apply, you must complete Form 15434. Application for Voluntary Disclosure Program for Employee Retention Loansavailable on IRS.gov. However, if you outsource your payroll to a third party that reports, collects, and pays payroll taxes on your behalf using the third party's EIN, the third party payer must file Form 15434.

If you don't qualify for the voluntary disclosure program but have submitted a questionable claim, you should consider withdrawing. Under the withdrawal option, those who have submitted an ERC claim but have not received a refund can withdraw their claim and avoid future refunds, interest and penalties.

If you are unsure which option is best for you, you can review the Voluntary Disclosure Program details in IRS Announcement 2024-30 and check your ERC eligibility on the IRS website.

ERC relief

The ERC program was intended to help eligible employers maintain operations at their businesses. Employers who paid qualified wages to some or all employees after March 12, 2020 and before January 1, 2022 are eligible. To qualify, you typically must demonstrate that your business was closed by government order due to the pandemic in 2020 or in the first three calendar quarters of 2021, or that you were closed during the eligibility periods in 2020 or in the first three calendar quarters have recorded a certain decline in gross revenues in 2021. Some companies may also qualify as turnaround startup companies for the third or fourth quarter of 2021.

The credit is 50% of up to $10,000 in wages, meaning it can be up to $5,000 per employee in 2020 and up to $21,000 per employee in 2021.

(The IRS has created a checklist to help businesses and other organizations decide whether they qualify for the ERC.)

More information

The IRS continually updates its website to answer questions related to ERC claims (some tax experts have argued that it is too little, too late). If you have questions about the supplemental application process, you can check out the IRS's FAQ page on this topic.

There is also an FAQ page on ERC eligibility, revoking an ERC claim, the ERC Voluntary Disclosure Program, accounting and fraud.

The penalties for submitting a false ERC application can be severe – and, depending on the facts and circumstances, can be criminal. And as previously mentioned, there is frustration with the claims and reimbursement process. If you have any questions, reach out to a trusted tax advisor who can help you determine your next steps.

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