Pressure is building on the IRS to help businesses waiting for their ERC refunds. We reported on IRS Commissioner Charles Rettig’s recent testimony to several Congressional committees in which he said, without providing any specifics, that backlogged ERC claims are being addressed as a priority.
As tax returns for 2021 become due, many employers are facing a dilemma of increased income tax caused by claiming the ERC for which they have not yet received payment from the IRS. The IRS, in section IV.C. of Notice 2021-49, has made it clear that there is no flexibility in the timing of the income tax effect from claiming the ERC:
“Under section III.L. of Notice 2021-20, a reduction in the amount of the deduction allowed for qualified wages, including qualified health plan expenses, caused by receipt of the employee retention credit occurs for the tax year in which the qualified wages were paid or incurred…. Section 2301(e) generally provides, in relevant part, that rules similar to the rules of section 280C(a) of the Code shall apply. Section 280C(a) requires tracing to the specific wages generating the applicable credit.”
In the past week, members of the House Ways & Means and Senate Finance committees have written letters to Treasury Secretary Janet Yellin and Commissioner Rettig asking for relief on this issue.
In a letter dated April 11, 2022, Senators Maggie Hassan (D-NH) and Ron Wyden (D-OR) wrote:
“A further consequence of the tax return backlog is that small businesses waiting for their 2021 ERTC payments will face higher up-front tax liabilities when filing their tax returns on April 18, 2022. In 2020 and 2021, the hardest-hit small businesses could choose either to claim the ERTC for eligible wages paid to employees, or to deduct these wages, but not both. As a result, certain small businesses that claimed the ERTC will report reduced wage deductions when filing their taxes this year, resulting in a higher tax liability – even if they are still waiting for the ERTC refunds that will more than make up for these reduced deductions. We urge the Treasury and IRS to use available authority to provide relief to these small businesses, such as by waiving relevant penalties so that small businesses can time their federal tax payments around the receipt of the ERTC.”
And in a letter dated April 13, 2022, 13 House members wrote:
“Entrepreneurs are relying on ERTC payments to stay in the black and survive in 2022. However, IRS Notice 2021-49 mandates that an employer claiming the ERTC must reduce the deduction for the corresponding wages, including qualified health plan expenses, on their federal income tax return in the taxable year the wages were paid or incurred. Due to delays in processing ERTC claims and the timing of the inclusion of additional income in 2021 federal income tax returns due this spring, many taxpayers will be responsible for an additional cash outlay before receiving the ERTC refund. Therefore, the timing of the inclusion creates a cash-flow problem for the same small businesses that the credit was created to financially assist. Collecting taxes from these small businesses before they can fully realize the relief Congress provided to keep them afloat is shortsighted and could cause them to miss payroll, reduce staff, or close their doors.”
Given the ongoing ERC refund claim backlog, and the mounting pressure from Congress, there is a significant possibility that IRS will provide some blanket relief, at least in the realm of penalty assessments. However, many employers will continue to amend 2021 payroll tax returns to claim the ERC retroactively, and these Congressional letters have not asked IRS to allow the 280C(a) income tax adjustments to be made in the year the ERC is received regardless of the year in which the qualified wages were incurred. Therefore, we don’t expect IRS to revise Notice 2021-49, and retroactive ERC claims will need to include amendments of 2021 income tax returns.