The Internal Revenue Service (IRS) created the ERC tax credit to support businesses and tax-exempt organizations that supported employees during COVID-19. However, the IRS reports that it is pausing the ERC tax credit due to reports of fraud, especially with the IRS seeing aggressive marketing that is misleading businesses and tax-exempt organizations to claim the tax credit.
CPAs must stay informed about the ERC’s nuances, especially considering recent developments. In this blog, we explain what CPAs should know about the ERC tax credit, addressing its purpose, eligibility criteria, recent IRS developments, and the actions CPAs should take.
What is the ERC Tax Credit?
The Employee Retention Credit (ERC) is a tax credit introduced by the IRS to encourage businesses to retain employees during periods of economic uncertainty.
Originally part of the CARES Act, the ERC aimed to provide financial relief to companies facing challenges due to the COVID-19 pandemic. It essentially functions as a refundable credit against certain employment taxes, giving eligible businesses with financial support to retain their workforce.
Also read: Payroll Compliance: How to Protect Yourself
Why is the IRS pausing the ERC?
The simple answer is fraud. The IRS has proactively addressed ineligible claims and aggressive marketing scams by pausing new claims for the ERC tax credit.
At the same time, the IRS is helping businesses that may have inadvertently filed an illegible claim. Suppose a company is concerned about the accuracy of its ERC tax credit and has yet to receive a refund. In that case, it can withdraw its application to avoid future repayment, interest, and penalties.
These moves together emphasize the need to check and double-check any claims for the ERC and ensure compliance with evolving regulations.
Does it apply to your clients?
The ERC is designed for businesses across various industries that experienced significant disruptions or declines in gross receipts due to the pandemic.
At first, it only applied to businesses that continued to pay employees even when operations were partially or fully suspended. Over time, the criteria evolved to include those facing a significant decline in gross receipts.
Businesses or tax-exempt organizations unsure about their eligibility should reference the IRS checklist and its information on the website.
What Do CPAs Need to Do?
For CPAs, staying informed about the ERC’s changing landscape is crucial. They should know the eligibility criteria, withdrawal processes, and potential pitfalls of claiming the credit. Staying on top of new developments from the IRS will be the best way to ensure accurate and timely information is provided to clients.
CPAs should also be sure of their ability to guide clients in assessing their eligibility. The IRS is cracking down on fraudulent claims to reduce the effect of fraud on small businesses, so accurate documentation has never been more critical.
Also read: Best Practices of Client Advisory Services
When will the ERC return?
The IRS is pausing new claims until 2024, giving businesses and tax-exempt organizations time until the new year to double-check their claims. The ERC tax credit will remain a vital lifeline for businesses navigating economic uncertainties. CPAs should also take this time to ensure employees are fully trained and understand the nuances of withdrawal from or compliance with the ERC tax credit.
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