Improper ERC Claim? Pay Back 80% and Keep the Rest

March 12, 2024 - 6 minutes read
ERC Claim

First question: Is your employee retention credit (ERC) claim improper? Are you sure?

If you’re sure, the IRS has a proposition for you.

Pay back 80 percent of all your ERC claims, and keep the remaining 20 percent.

You read that right.

Say you made an improper employee retention credit claim, received the improper cash, and put that improper cash in your bank account.

Now, because the claim was wrong, you return 80 percent of the credit to the IRS and keep the remaining 20 percent, including interest. That’s a good deal.

But it gets even better.

Your 20 percent is tax-free. And you get to keep the interest you received on the 100 percent.

Example:  In 2023, you amended some of your 2020 and 2021 payroll tax returns using IRS Form 941-X and collected $200,000 in ERC cash plus $12,000 of interest from the IRS. Now, however, you realize that was wrong. No problem! Just complete some IRS paperwork to qualify, wait for approval, and then return $160,000. You keep the rest—$40,000 is tax-free ($200,000 – $160,000), and $12,000 is taxable.

Why Is the IRS Doing This?

With the 80 percent payback deal, the IRS has you name the tax preparers, payroll processing companies, and ERC scammers who filed or helped you file your improper claim.

You give the IRS their names, addresses, and telephone numbers, and you tell the IRS what services they provided in connection with the improper claim.

Why 80 Percent?

The IRS reasons that you likely paid a percentage fee for help with your improper ERC claim, and thus you never received the full amount of the credit—therefore, the 80 percent.

Be Quick! Time for Filing Is Short

You must first request to claim $0 ERC before midnight on March 22, 2024. You do this electronically using IRS Form 15434.

Next, the IRS reviews your application package and mails you a letter telling you whether your application is accepted or rejected.

Accepted: If your application is accepted, the IRS mails you a closing agreement. The agreement must be signed and returned within 10 days of the date of mailing by the IRS—so stay alert.

You make your multiple 80 percent repayments as directed by Form 15434 using the Electronic Federal Tax Payment System (EFTPS). You should make these payments at the same time you sign and submit the closing agreement.

Key point: Don’t let the Form 15434 instructions confuse you (they can be confusing). Here are the steps you need to follow for the 80 percent payback deal:

  1. Complete IRS Form 15434.
  2. Wait for the acceptance or rejection letter. If accepted, wait for the closing agreement.
  3. Sign and send the closing agreement to the IRS.
  4. On the day you send the closing agreement to the IRS, use EFTPS to make your multiple 80 percent payments.

Form 15434 makes it sound like you should submit the multiple payments when you complete the form. The IRS states in its FAQs: “Paying at the time you apply for the ERC-VDP can help speed up processing and resolve your case more quickly.”

Recommendation: Wait for the closing agreement before paying. If you pay upfront, here is what happens:

  • Your money is in limbo for the time it takes the IRS to process your claim.
  • The IRS could reject your claim—and because you paid upfront with the form, the IRS now has your money.

Rejected: If the IRS rejects your application, it will explain why in its rejection letter and will offer potential solutions.

The Big Question: Should You Go for the 80 Percent?

Before doing anything, check your ERC claim. Is it valid?

It’s possible that many small businesses that qualify for the ERC will mistakenly do the 80 percent deal—to their detriment. Think back to the example in the opening of this article:

  • If the claim is valid, you win by $200,000.
  • If the claim is invalid, you win by $40,000.

That’s a $160,000 difference. Nothing to sneeze at.

Key point: Confirm whether your claim is valid or invalid before taking action.

Criminal Aspect

Executing the 80 percent closing agreement does not preclude the IRS from investigating you for any associated criminal conduct or recommending prosecution for violation of any criminal statute, and does not provide any immunity from prosecution.

If you have any questions related to your business, book a call with us!

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Be sure to check out last week’s Tax Tuesday blog, a deep-dive on The Corporate Transparency Act (CTA) and it’s impact on small businesses.