Employers That Claimed the IRS’ Employee Retention Credit Should Verify Compliance

In 2020, Congress established a new employee retention credit to help businesses that were struggling as a result of the economic impacts of the COVID-19 pandemic. Congress extended the employee retention credit for 2021, but in doing so, it also established new eligibility requirements.

Due to widespread COVID-19 relief fraud, the Internal Revenue Service (IRS) and other federal agencies are now aggressively targeting businesses and individuals suspected of illegally taking advantage of pandemic-related programs. This includes the employee retention credit. With this in mind, employers that have claimed the employee retention credit would be well-served to verify their eligibility—and to take appropriate remedial action if necessary.

What Businesses Were Eligible to Claim the Employee Retention Credit?

As the IRS explains, “[t]he Taxpayer Certainty and Disaster Tax Relief Act of 2020 . . . made a number of changes to the employee retention tax credits previously made available under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), including modifying and extending the Employee Retention Credit.” While these modifications expanded eligibility in some respects, they restricted eligibility in others. For 2021, employers were only eligible to claim the employee retention credit for “qualified wages” if they either:

• Experienced “[a] full or partial suspension of the operation of their trade or business during this period because of governmental orders limiting commerce, travel or group meetings due to COVID-19” in 2021; or,
• Experienced “[a] decline in gross receipts in a calendar quarter in 2021 where the gross receipts of that calendar quarter are less than 80% of the gross receipts in the same calendar quarter in 2019.”

Under the Taxpayer Certainty and Disaster Tax Relief Act of 2020, the definition of “qualified wages” varied for companies with more or less than 500 full-time employees (based on average numbers from 2019). For larger employers, qualified wages were those paid to employees who were “not providing services because operations were fully or partially suspended or due to the decline in gross receipts.” For smaller employers, qualified wages included all compensation paid to employees during periods of suspended operations “regardless of whether the employees [were] providing services.”

What Should Businesses Do If They Improperly Claimed the Employee Retention Credit?

Let’s say your business improperly claimed the employee retention credit in 2020 or 2021. If this is the case, what should you do to minimize your company’s risk of facing an IRS audit or criminal tax fraud investigation?

The answer to this question depends on the circumstances at hand. One option may simply be to file an amended return. However, this approach also has the potential to trigger IRS scrutiny—particularly in light of the IRS’ current focus on combating COVID-19 relief fraud. Submitting a voluntary disclosure may be an option as well, although this option presents its own unique set of risks for employers.

Get the Advice You Need from Tax Attorney Kevin E. Thorn

If you have concerns related to the IRS’ employee retention credit (or any other business-related tax matter), we encourage you to contact us for a confidential consultation. To schedule an appointment with tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, please call 202-349-4033, email ket@thornlawgroup.com or contact us confidentially online today.