ERC Issue? Return Most of the Claim and Keep Some
You read that right.
Say you made an improper employee retention credit (ERC) claim, received the improper cash, and put that improper cash in your bank account.
Now, because the claim was wrong, you return 80 percent of the credit to the IRS, and keep the remaining 20 percent, including interest. That’s a good deal.
But it gets even better.
Your 20 percent is tax-free. And you get to keep the interest you received on the 100 percent.
Example. In 2023, you amended some of your 2020 and 2021 payroll tax returns using IRS Form 941-X and collected $200,000 in ERC cash plus $12,000 of interest from the IRS. Now, however, you realize that was wrong. No problem! Just complete some IRS paperwork to qualify, wait for approval, and then return $160,000. You keep the rest—$40,000 is tax-free ($200,000 - $160,000), and $12,000 is taxable.
Why Is the IRS Doing This?
With the 80 percent payback deal, the IRS has you name the tax preparers, payroll processing companies, and ERC scammers who filed or helped you file your improper claim.
You give the IRS their names, addresses, and telephone numbers, and you tell the IRS what services they provided in connection with the improper claim.
Why 80 Percent?
The IRS reasons that you likely paid a percentage fee for help with your improper ERC claim and thus you never received the full amount of the credit—therefore, the 80 percent.
Be Quick! Time for Filing Is Short
You must first request to claim a $0 ERC before midnight on March 22, 2024. You do this electronically using IRS Form 15434.
Next, the IRS reviews your application package and mails you a letter telling you whether your application is accepted or rejected.
Accepted. If your application is accepted, the IRS mails you a closing agreement. You must sign and return the closing agreement within 10 days of the date of mailing by the IRS—so stay alert.
You make your multiple 80 percent repayments as directed by Form 15434 using the Electronic Federal Tax Payment System (EFTPS). You should make these payments at the same time you sign and submit the closing agreement.
Key point. Don’t let the Form 15434 instructions confuse you (they can be confusing). Here are steps you need to follow for the 80 percent payback deal:
Complete IRS Form 15434.
Wait for the acceptance or rejection letter. If accepted, wait for the closing agreement.
Sign and send the closing agreement to the IRS.
On the day you send the closing agreement to the IRS, use EFTPS to make your multiple 80 percent payments.
Form 15434 makes it sound like you should submit the multiple payment when you complete the form. The IRS states in its FAQs: “Paying at the time you apply for the ERC-VDP can help speed up processing and resolve your case more quickly.”
Recommendation. Wait for the closing agreement before paying. If you pay upfront:
Your money is in limbo for the time it takes the IRS to process your claim.
The IRS could reject your claim—and because you paid upfront with the form, the IRS now has your money.
Rejected. If the IRS rejects your application, it will explain why in its rejection letter and will offer potential solutions.
2020 ERC?
If your application to return 80 percent of your total ERC includes any tax period in 2020, you must include a completed, signed ERC-VDP Form SS-10 consenting to an extended time for the IRS to examine your employment taxes for the 2020 year.
There’s logic to this requirement. The statute of limitations for claiming the 2020 ERC expires on April 15, 2024.
Short of Cash?
If you are short of cash and can’t pay the 80 percent, you can enter into an installment agreement. But the installment agreement, unlike the cash payment, comes with strings: you have to pay penalties and interest (but only from the agreement date forward).
Income Tax Implications
By entering into the 80 percent deal, you claim $0 ERC. (It’s an all-or-nothing deal.)
You treat the 20 percent of the ERC you don’t have to give back to the IRS as tax-free income, and then either
do nothing if you have not reflected the ERC on any prior income tax return, or
amend original or amended returns if you reflected the ERC on them.
The IRS does not name the interest you received as taxable or non-taxable—but that likely means it’s taxable.
The Big Question: Should You Go for the 80 Percent?
Before doing anything, check your ERC claim. Is it valid?
It’s possible that many small businesses that qualify for the ERC will mistakenly do the 80 percent deal—to their detriment. Think back to the example in the opening of this article:
If the claim is valid, you win by $200,000.
If the claim is invalid, you win by $40,000.
That’s a $160,000 difference. Nothing to sneeze at.
Key point. Confirm whether your claim is valid or invalid before taking action.
Criminal Aspect
Executing the 80 percent closing agreement does not preclude the IRS from investigating you for any associated criminal conduct or recommending prosecution for violation of any criminal statute, and does not provide any immunity from prosecution.
Takeaways
In an unusual move, the IRS will allow you to retain 20 percent of your improperly claimed ERC. This is an all-or-nothing deal. If you take the deal, you return 80 percent of all your ERC claims.
The 20 percent you keep is tax-free. You also keep the interest, if any, paid on your ERC claims. The interest is not tax-free.
To take advantage of the deal, you must provide the IRS with detailed information about the tax preparers or firms that assisted with the improper ERC claim.
Don’t sleep on this. To get the 20 percent, you must file IRS Form 15434 by March 22, 2024; wait for an IRS response; reply; and then pay the 80 percent. If you don’t have the cash to repay the 80 percent right away, you can enter into an installment payment plan with the IRS.
If you are considering the 80 percent deal, first determine whether your ERC claim is valid or invalid. If you miscalculate, you could be out an unnecessary 80 percent of your ERC.
