Proposed Bill Would Bar ERC Claims After January 31 and Increase Promoter Penalties
Today, House Ways and Means Committee Chairman Jason Smith (R-Mo.) and Senate Finance Committee Chairman Ron Wyden (D-Ore.) proposed a bipartisan bill that would bar the filing of Employee Retention Credit (“ERC”) claims after January 31, 2024. The proposed legislation also would (i) substantially increase the penalties that may be imposed against certain promoters of ERC claims, (ii) make the most severe penalties retroactive to March 2020, and (iii) lengthen the statute of limitations period on assessment for ERC-related claims from five to six years. The ERC reforms are included as part of a $78 billion tax bill, titled The Tax Relief for American Families and Workers Act of 2024, which includes additional measures, such as directing $33 billion in funding to partly extend an expansion of the child tax credit and another $33 billion to reinstate expired business tax benefits related to research, business and capital deductions.
Under current law, taxpayers are able to claim COVID-related ERC benefits until April 15, 2025. The proposed bill would bar any ERC claims filed after January 31, 2024.
The proposed bill also seeks to aid the enforcement of ERC abuse by significantly enhancing penalties for promoting ERC claims. The bill increases the penalty for aiding and abetting the understatement of tax liability by a COVID-ERC promoter from $1,000 to the greater of $200,000 ($10,000 in the case of a natural person) or 75% of the gross income of the ERC promoter for providing aid, assistance, or advice with respect to an ERC claim. The bill also increases the penalty applicable to a paid tax preparer who fails to conduct proper due diligence with respect to an ERC claim from $500 to $1000 for each failure to comply. Any paid tax preparer who fails to conduct proper due diligence is also deemed to know that his or her aid, assistance, or advice would result in the understatement of tax for purposes of the penalties for aiding or assisting in the understatement of tax. The proposed bill also extends to ERC promoters certain record-keeping requirements previously applicable to material advisors of abusive tax transactions.
The bill defines an ERC promoter as any person who provides aid, assistance, or advice with respect to an affidavit, refund, claim, or other document relating to ERC who either receives a fee based on the amount of the credit or whose gross receipts for such activities exceeds certain thresholds. This definition will capture all ERC promoters who received fees based on a percentage of their clients’ ERC credits, a practice that the IRS has decried in repeated warnings since the advent of the ERC program. Significantly, the bill makes penalties for aiding, assisting, or advising the understatement of tax by an ERC promoter retroactive to March 12, 2020. The increased penalties associated with due diligence become effective upon enactment.
The bill also extends the statute of limitations on assessment for ERC refunds that were illegitimately paid from five years to six years. The statute of limitations related to ERC claims was previously extended in 2021 from three years to five years. The bill also extends the period for taxpayers to claim valid deductions for wages attributable to invalid ERC claims that are corrected after the normal period of limitations.
The proposed legislation follows announcements by the IRS of separate programs by which ERC claimants may withdraw pending ERC claims or voluntarily disclose illegitimate ERC claims and receive no penalties. As part of the voluntary disclosure process, claimants are required to identify anyone who aided or assisted them with their ERC claim, information which the IRS will use to identify and penalize promoters under the new legislation once it becomes enacted into law.
The ERC, created under the CARES Act to assist businesses that continued to pay their employees during the COVID-19 pandemic, is a refundable tax credit that allows employers to offset their employment taxes against a percentage of qualified wages paid to employees. Eligible taxpayers can claim the ERC on an original or amended employment tax return for an eligible period between March 13, 2020, and December 31, 2021. To qualify for the ERC, a business must meet one of the following three criteria:
- Experienced a full or partial suspension of operations resulting from a government order issued due to the COVID-19 pandemic during 2020 or the first three quarters of 2021;
- Experienced a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021 as defined by the criteria set forth in the appropriate IRS guidance (Notice 2021-20 for 2020 and Notice 2021-23 for 2021);
- Qualified as a recovery startup business for the third or fourth quarters of 2021 as defined in Notice 2021-49.
Since October 2022, the IRS has been warning taxpayers to be wary of dubious ERC schemes. Last March, the IRS issued IR-2023-49, placing abusive ERC schemes at the top of its 2023 list of “Dirty Dozen” transactions.
For more than 75 years, Kostelanetz LLP has built a global reputation as a law firm of choice for clients facing high-stakes controversies and negotiations with government agencies.
Our attorneys include a former Acting Assistant Attorney General of the Department of Justice (DOJ) Tax Division, immediate past Chief of the IRS Criminal Investigation Division, former DOJ Tax Division trial and appellate attorneys, and others with significant government experience. As a result, Kostelanetz LLP attorneys are particularly well-positioned to represent taxpayers who find themselves subject to these heightened enforcement efforts and are regularly called upon to handle the most challenging and sensitive cases and internal investigations.
Earlier this year, Chambers recognized Kostelanetz as a leader in Tax: Controversy (Nationwide), Tax: Fraud (Nationwide), White-Collar Crime and Government Investigations (New York), and Tax (New York and District of Columbia). Regarding the firm’s tax-related work, Kostelanetz clients told Chambers that “The firm has a deep bench of highly trained and sophisticated attorneys,” “the team is stellar, knowledgeable, and experienced,” and “Kostelanetz attorneys are conscientious, intelligent and responsive.” The firm also has been recognized by U.S. News—Best Lawyers®, identified as a Tier 1 firm for Litigation and Controversy – Tax (Nationwide, New York, and District of Columbia), Criminal Defense: White-Collar (Nationwide, New York, and District of Columbia), Tax Law (Nationwide, New York, and District of Columbia), and Commercial Litigation (New York) in 2023. Kostelanetz LLP was named Litigation and Controversy – Tax “Law Firm of the Year” in 2022 and 2021 by U.S. News – Best Lawyers® “Best Law Firms.”