Employee Retention Tax Credit

What is the Employee Retention Tax Credit (ERC)?

The Employee Retention Credit (ERC) is a refundable federal tax credit that was available to certain eligible businesses and tax-exempt organizations that had employees and were affected during the COVID-19 pandemic. The credit applies to employers that kept paying employees during the COVID-19 pandemic (from March 13, 2020 to December 31, 2021) either:

  • when they were shut down due to a government order, or
  • when they had the required decline in gross receipts during certain eligibility periods in 2020 and 2021, or
  • qualified as a recovery startup business for the third or fourth quarters of 2021.

IRS Moratorium and Elevated Audit Activity

Many businesses may have been misled by aggressive marketing tactics by ERC promoters, leading them to incorrectly claim the credit.  Due to the large volume of ERC claims and IRS concerns about incorrect or fraudulent claims, on September 14, 2023, the IRS announced a moratorium through the end of 2023 on processing new claims filed on or after September 14, 2023. In October of 2023, the International Revenue Service (IRS) announced that it initiated 301 criminal investigations of ERC claims involving over a total of $3.4 billion. The IRS has also initiated thousands of audits of ERC claims and has numerous open promoter investigations. The number of audits and investigations is expected to increase as ERC claims remain a key IRS priority.  

IRS Voluntary Disclosure and Withdrawal Programs

On December 21, 2023, the IRS announced a Voluntary Disclosure Program to help businesses who want to pay back money received after filing an incorrect ERC claim. Interested taxpayers must apply for the program by March 22, 2024 and repay 80% of the funds they received. The IRS also offers a separate procedure to withdraw an ERC claim that has not yet been paid and avoid penalties and interest on that claim if it is audited.  The withdrawal program may not only avoid penalties and interest, but also potential criminal liability. 

Defending an IRS Audit and Pursuing your ERC claim in Court

As noted, the IRS is focusing on ERC claims and has ramped up audit activity, including promoter audits, and criminal investigations into invalid and fraudulent ERC claims.  Taxpayers must be prepared to defend their ERC claims with appropriate substantiation and proof of eligibility for the ERC. ERC audits are often accelerated and taxpayers must be ready to respond and meet IRS deadlines.  If the IRS denies an ERC claim, the taxpayer must make sure to meet IRS administrative appeal deadlines or they will lose a critical opportunity to challenge the denial outside of formal litigation.  If an ERC audit cannot be resolved administratively, taxpayers must pursue their ERC claim in federal district court.  In the face of significant IRS delays on even legitimate ERC claims, filing a lawsuit may be the taxpayer’s best option to pursue its ERC claim.

Simplifying Your ERC Claim: How a Tax Professional Can Guide You Through the Process

Given the complex and serious nature of Employee Retention Credit audits and investigations, as well as the potential benefits of the ERC Voluntary Disclosure and Withdrawal Program, it is imperative to work with a seasoned tax attorney that can offer expert guidance in these legal matters. At Sideman & Bancroft, our tax attorneys have extensive experience representing clients in IRS audits, criminal investigations, and Voluntary Disclosures, including in ERC matters. Our attorneys communicate directly with IRS agents during IRS audits and strategize with other professionals who interface with IRS agents, then handle appeals of IRS audit determinations and any necessary litigation.  Moreover, our Firm houses a distinguished criminal tax practice led by Jay Weill, former Chief of the Tax Division of the U.S. Attorney’s Office in San Francisco. This specialized arm of our practice is equipped to handle investigations, trials, plea negotiations, sentencing, and appeals, should the federal or state government pursue more serious criminal action. We are committed to providing comprehensive legal support tailored to the unique needs of each client. 

ERC Tax Contact

If you need help regarding an ERC matter, contact Sideman & Bancroft using the form below or reach out to our Tax group leader, Steve Katz directly.