Employee Retention Credit (ERC): Eligibility, IRS Enforcement & Voluntary Disclosure

The Employee Retention Credit was a legitimate and significant pandemic-era tax credit for businesses that retained employees during COVID-19 shutdowns and revenue declines. It was also one of the most aggressively marketed tax schemes in recent history - promoters filed hundreds of thousands of fraudulent or questionable claims on behalf of businesses that did not qualify. The IRS response has been equally aggressive: a moratorium on processing new claims, 20,000+ disallowance letters, expanded audits, and criminal referrals. Businesses with ERC claims - whether filed directly or through a promoter - need to evaluate their position now, before IRS contact.

Actual ERC Eligibility Requirements

The ERC was available to eligible employers for quarters in 2020 and 2021. An employer was eligible for a given quarter under one of two tests:

Test 1: Significant Decline in Gross Receipts

Test 2: Full or Partial Suspension Due to Government Orders

The business was subject to a governmental order (federal, state, or local) that fully or partially suspended the operation of the trade or business. This is where most of the fraud occurred. Promoters told businesses that general pandemic-related orders (shelter-in-place orders, capacity restrictions, mask mandates) automatically qualified any business. That is incorrect.

The government order must have had more than a nominal effect on the business. A restaurant that was forced to close its dining room and could only do takeout was partially suspended. An office-based professional services firm whose employees continued working from home under a general stay-at-home order was generally not suspended - working from home is still working.

The Credit Amounts

The Statute of Limitations: Extended for ERC

The normal 3-year statute of limitations for employment tax returns was extended for ERC purposes. The IRS has 5 years from the later of the date the return was filed or the due date of the return to assess additional employment taxes for ERC claims. For quarters in 2020, the window runs until approximately 2025-2026. For 2021 quarters, the window extends to 2026-2027. Businesses with questionable ERC claims are not safe simply because time has passed.

What Businesses With Questionable Claims Should Do

Businesses that received ERC based on promoter advice without solid legal support have several options depending on their situation:

• Retain qualified counsel and do an eligibility analysis now. If the claim is legitimate, document the basis fully in case of audit. Government order eligibility requires specific contemporaneous documentation of which orders applied, their effective dates, and how they affected operations.
• If the claim is not defensible, consult with a tax attorney about options. The VDP programs are closed, but a voluntary amended return (Form 941-X) repaying the credit before IRS contact may result in more favorable treatment than waiting for a disallowance letter.
• Evaluate promoter agreements for indemnification. Some ERC promoters guaranteed their work and agreed to cover penalties if the credit was disallowed. Many did not. Businesses bear ultimate responsibility for the accuracy of their returns regardless of who prepared them.