Many business owners have had to make sacrifices while waiting for Employee Retention Credit funds. And it’s likely they’ll be waiting many more months, if not years, for the funds.
The Employee Retention Credit is a refundable tax credit that was established through the Coronavirus Aid, Relief and Economic Security Act to provide relief for businesses that kept employees on their payroll during the COVID-19 pandemic.
Anthony Mangiarelli, partner and director in the enterprise solutions group for Kahn, Litwin, Renza & Co., says the firm has dozens of clients who have been waiting 18 months to two years for the funds. These businesses are not alone, as hundreds of thousands that applied for the credit nationwide are in the same situation.
In the meantime, many have had to put expansion plans on hold, and in some cases sell assets or cut employees. A lot of businesses have also had to look for alternative ways of getting cash, most commonly through bank loans and lines of credit.
“Most clients we work with have resigned themselves to the fact it will take time,” Mangiarelli said.
The delays stem from an influx of ineligible and fraudulent Employee Retention Credit claims. Since the ERC launched in 2020, many companies have been the target of a variety of pop-up marketers advising them to apply for the credit when they may not technically qualify. As a result, the IRS placed a moratorium on processing new claims submitted after Sept. 14, 2023. Then three months ago, the IRS started processing claims submitted after Sept. 14, 2023, and placed a moratorium on claims submitted after Jan. 31, 2024.
The IRS has made progress on processing claims, announcing on Oct. 10 that it had processed approximately 400,000 claims representing close to $10 billion. The claims being processed include both eligible and ineligible ones, although a vast majority are being processed for approval.
“We are continuing to make important progress on one of the most complex tax administration provisions we’ve ever had,” IRS Commissioner Daniel Werfel said in a statement. “The IRS is working diligently to process ERC claims as quickly as possible.”
Still, the IRS has many more to process. And in some cases, businesses are losing money.
This is because of the way business owners seeking the funds had to amend their tax filings. Businesses can typically deduct the amount paid to employees as a necessary business expense from income tax returns. But those applying for ERC funds were required to change their filings to remove the deduction for any of those wages – leading them to owe more in taxes.
“Taxpayers are getting whipsawed in terms of what to do on these income tax amended returns,” said Bill Smith, national director of tax technical services at CBIZ CPAs PC. “It’s a mess.”
But the statute of limitations for businesses to file a lawsuit to get these deductions back is two years – likely before the IRS will finish processing all of the claims.
Smith suggests businesses file a protective claim for a refund. In that case, the IRS can deny it or do nothing. If they do nothing, then there is no statute of limitations for when you have to file a lawsuit. If it’s denied, then a business has to file a lawsuit within two years of the denial.
But the deadline for Employee Retention Credit applications may change.
The deadline to submit claims for ERC funds related to 2020 was April 15 and the current deadline to file for claims related to 2021 is April 15, 2025.
Under the draft federal legislation, the Tax Relief for American Families and Workers Act of 2024, the ERC claims filed after Jan. 31, 2024, would be considered no longer eligible.
The bill overwhelmingly passed the House earlier this year with a 357-70 vote. But it has faced pushback from the Senate, and Smith says it is not expected to be taken up again until after the presidential election.
If passed, this law would take many items off of the IRS’ lengthy list of claims to be processed, but it could also mean many businesses may not see the amount of funds they were expecting.
“It’s a very procedural quagmire that’s been created by this,” Smith said.
Also, the IRS has reopened its voluntary disclosure program in which businesses that believe they filed an Employee Retention Credit in error can repay part of the claim without facing any interest or penalties. The deadline for businesses to correct their claims is Nov. 22.
Those who take part in the program can repay the IRS 85% of the claim they received. Mangiarelli says this is the IRS’ way of acknowledging that some businesses may have paid fees to advisers who gave them faulty guidance on their ERC claims.
Mangiarelli expects the next wave of requests related to the program will be claim auditing.
“We’ll be hearing about this for years to come,” he said.
