On today's podcast, what's the latest on the employee retention credit? Hello, everyone, and welcome back to the AICPA Tax Section Odyssey podcast, where we offer thought leadership on all things tax facing the profession. I'm April Walker, Lead Manager from the Tax section, and I'm here today with Chris Wittich. He is a friend of the podcast. He is a lover of tigers. More importantly, for our conversation today, he is my favorite ERC guru.
We're coming up on the five-year anniversary of the CARES Act, which is, I don't know if it is to you, Chris, it is a little bit mind blowing to me. ERC is going to kindergarten.
It's going to kindergarten before any of my children go to kindergarten. Yes, the CARES Act was childless tiger, and a lot has changed. A lot of ERC guidance has come and gone, and some is still pending but never to arrive. It's been quite a journey.
Thanks for joining us today. As you referenced, there's a lot to discuss on this topic, and we've talked about it multiple times on the podcast, and we still have some things that have us scratching our heads. I thought it would be a good idea to do a quick update on what we know, what we don't know, and also, there are some key deadlines coming up, so I thought it would be a good topic for today. To start off with, let's talk about the statute of limitations.
What that means for both ERC claims themselves for 2021, and then also what it means for income tax returns and that statute.
The statute is the same, but it means two different things. I know my clients are often confused about this. The statute really runs April 15th, 2025, so in about a month, and that would be the deadline to submit your 941-X claim, for an ERC claim in 2021. As my clients like to remind me, they're like, well, what is the deadline for the IRS to pay my claim?
Well, sorry, there is no deadline for them to pay your claim, but you need to get it submitted on time, and that means you got about a month left. Anybody who believes they do qualify for ERC in the year 2021, you've got until April 15th, 2025 to get that thing submitted. I will add there is much uncertainty as to whether or not it will ever be processed. But if you don't get it submitted by April 15th....
One hundred percent certainty that it will not be processed.
Same thing applies to the income tax. When you file for the ERC, that money is essentially taxable. Typically, people were doing this after the fact so they were amending their 2021 tax return to show that income. The deadline for that is in most cases going to be April 15th, 2025 to pay that tax liability.
We run into this statute of limitations problem all the time where somebody submitted a claim, it might be a large claim, maybe it's a small claim, but they cannot afford to pay the tax until they actually receive the money. So they're left looking at these statutes, saying, well, I made a claim of $1 million, and now I owe $300,000 of income tax. But I don't have $300,000, so how am I supposed to file the amended return by April 15th, 2025? Pay the $300,000, which I do not have.
What do I do? There's just a lack of guidance in this area. But that's the statute, and that's the issue that people are running into.
It might not be April 15th if you filed an extension. I just want to throw that out there and make sure you understand. For the ERC itself, it is definitely April 15th. That is clear. But then you would have to look at when the 2021 return was filed in 2022 for 2021, if I'm saying that correctly.
Or if you filed the late return. Statutes for income tax can vary a little bit, and extensions do come into play there. But I think for a lot of people, it's going to be the April 15th.
April 15th. It's coming up really, really quickly. You alluded to this, but let's dig into it a little bit more, because we have years already that have expired. 2020, there was an option for ERC claims, and we filed income tax returns, and there probably are some 2020 ERC claims that are still outstanding and haven't been processed. We'll talk about processing in a few minutes. But what to do if the statute has already expired or is getting ready to expire?
Let's just talk about what we know, maybe what we don't know on that issue, and maybe some suggestions you have how you're handling that with your clients.
I think the biggest thing, whether it's 2020 or 2021, is to inform and educate the client. It is ultimately their decision for how to proceed. But it's a real problem. You're just between a rock and a hard place. Either you file this amended return and you incur this tax liability, which you don't have the cash to pay, or you don't file the amended return, the statute expires, and then you're intentionally doing it wrong. There's no guidance from the IRS on this issue. We know that the IRS
knows it is a problem. It is an issue. They've indicated that they intended to issue guidance, but that was due three months ago. If we're realistic, there's no reason to believe that guidance is coming in the next month. That's when all these decisions need to be made. You talk to the client about it, you educate them. I have clients that got 2020 refunds last week. They did not amend their 2020 return. That statute of limitations is closed. What are they supposed to do?
I know some practitioners and some clients are submitting the 2020 amended returns anyways, even though they're late. We know that in most of the cases, the IRS is sending it back because it's late, and they're sending back the check, which sounds crazy.
Sounds crazy.
Will they send it back to you? That's what's happening. To me, I don't see a particular reason to file something after the statute is closed, and we know that the IRS is not really going to process those. I know there are some people out there who think filing it anyways so that you can demonstrate you tried is a good idea. They don't know that that's really based on anything. I get the logic behind it, and I probably have some clients that will do that, and that's fine.
I think you just need to be sure that the clients know so that this April 15th doesn't come and go, and then they get their check in May, and then the client's like, well, you never told me the income tax statute just ran a month ago kind of a thing. That's what you really want to avoid. But otherwise, there's no good answers here. People are either going to be paying tax on cash they don't have, or they're going to be watching the statute expire while they're waiting for their checks.
Part of the reason why we wanted to do this, because there is a little bit of time there, at least for the 2021, hopefully, this is not the first time that this discussion has been had. As this has been going on, best case scenario, you should be saying, this is what's happening. When you filed the ERC claim, that is when the amended return is triggered. Totally get. There's been a lot of uncertainty around these claims. This is April talking.
I wonder if the IRS is still going to potentially say something or have a fix after the fact, after the statute expires. Again, don't hear me say that this is just me speculating, not any factual information. But what do you think about that?
I could see that. You didn't have to read too far between the lines to hear from people at the IRS that this guidance is written. I know that it's written. Getting it published is a different step. I have no reason to think it's going to get published in the next month before this deadline runs, but that doesn't mean that May 1st, they can't publish the guidance because I have heard on very good authority it's written. How they get stuff published at the IRS is [OVERLAPPING]
It has to go through all the chain of command. [LAUGHTER] The attorneys and all of that.
As there's no head of the IRS. It's just a second acting commissioner. After a new commissioner gets approved, will that guidance see the light of day? Yeah, it's possible. It'll be really unfortunate if it's after April 15th. You wait for the whole thing to close, and then you issue the guidance? That's crummy timing. But some guidance would absolutely be better than no guidance at all, just to give people some clarity.
A little bit of peace of mind.
To be clear, I have no idea what this guidance says. I've heard from a couple of people now at the IRS that it exists and it's written. I don't know what kind of a fix or acknowledgment it might have around the statute of limitations. The other thing that could in theory happen is Congress could change the statute of limitations.
Oh, that's right.
There had been a bill floated last year that would have that. That could come back this year because we know there's likely to be a very large tax bill. But they could always slide it in there. No official guidance from the IRS, but you could get either IRS guidance or congressional action this summer. That's certainly possible.
Again, we're just speculating. I think just backup communication and making sure your clients are understanding what the situation is, and then you have documented that it's their decision and what they're deciding to do is the important part. We alluded to this also, but I'd like to talk a little bit about, for ERC claims, what is being processed now by the IRS. What is still pending or what is still under a moratorium? Remind us of that, that's pretty easy.
Then what have you been seeing and hearing about the processing of claims? Chris Wittich: Processing is slow. That has been true for quite a while now. But technically, the moratorium, originally, it was in September of 2023, they modified that. It's January 31st, 2024. I know I have clients that filed claims on January 30th, 2024. Those claims are eligible for processing, at least in theory.
Anything filed in February 2024 or the summer or fall of 2024, or those people filing now, that is in moratorium land, which I describe as, the IRS is going to take your claim, and they are going to put it on a special shelf, and they may or may not ever look at the things on the special shelf, but they're parking them on a shelf for now. In practical sense, we have definitely seen claims filed in October, November, December of 2023 get processed.
Those were filed after the first moratorium date. We have absolutely seen processing of those claims. I would not say we've seen processing of all the claims. I was talking to somebody yesterday. They filed on Halloween, 2023, and they got one quarter, one check, last week, and they're like, where are the other two? I'm like, I don't know. They might show up tomorrow, and they might show up three months from now and they might show up Never. yeah, I guess they're still to be processed.
When somebody files three claims, they do not get processed on the same day. Occasionally, they do. But usually, it's like you get one claim now, you get another claim later, you get another claim later. Occasionally, they're pretty tightly processed together, but oftentimes they're getting separated and processed independently and separately. We've seen claims filed in the fall of 2023 get processed. I don't believe I have seen any filed in January 2024 as of yet.
But just to give you an idea, the one that filed in Halloween, that's 16-and-a-half months to get processing? There's a bunch more that have been longer than that. I have other claims that filed in the summer of 2023 before the moratorium, and they're just getting processed now. So processing times are all over the place. I would tell people 12-24 months. Assuming you don't use a PEO, those PEO claims are worst
Where in the world are they? Chris Wittich: They're gone forever. You'll get them in 2050. That's helpful, though, because it does seem that how they process the quarters is not necessarily in order of the quarters. Seems like no rhyme or reason, but that's your experience.
None that I can see. It's entirely haphazard. It makes no sense. It's not like the high risk quarters are taking longer than the low risk. It's just like a grab bag as to what you're going to get and when you're going to get it.
You talked about this a little bit, but how are you managing your clients' expectations around this delayed processing?
It's difficult. Even when I was doing them originally, I was telling them it could be 6-12-18 months, which is a ludicrous time frame to start with. Now some of them are reaching back out and they're like, it's been 18 months, and I'm like, yeah, let's keep waiting. Really nothing you can do. A lot of clients are like, well, let's just call them every day. The old squeaky wheel gets the grease. I'm like, well, you can be as squeaky as you want. I'm not going to call them every day for you.
But if you'd like the phone number, you can call them every day. This is not going to help your processing time. You can definitely call and make sure they have the claim. Occasionally, you'll get wind of when it'll be processed or if there's an issue with it. But the vast majority of the time, they just say, yeah, it's in for processing, but we have no idea when. Not a ton of information you can get.
Clients aren't always excited to hear that, but, and this will sound strange, they're comforted by the fact that this is happening to everyone. Every client thinks, oh, the IRS lost my claim. It's like, no, I have dozens and dozens and dozens and dozens of these that have all been waiting 18 months. Then they feel like, well, at least it's happening to everyone, and I'm not getting singled out, because I think that's where clients get nervous or scared. They're like, IRS doesn't like my claim.
I'm like, well, no, they're just slow at processing all of the claims. Has nothing to do with yours in particular.
But the IRS could be having a problem with your claim. That is a option, and so the denial letters. There are some different letters that could be sent or adjustments the IRS is dealing with. Let's talk a little bit about what you've seen there as far as denial letters and what trends or patterns have you noticed. I'll just be optimistic in response to where you get a denial letter, you're sending a bunch of information. How's that going for you?
There's basically three kinds of notices. We've seen all three. There's a 6577. I would say that's been the most common of all the notices. That one comes after your claim. A claim that was filed and paid out two years ago, three years ago, they are now getting a 6577 notice, which essentially is a partial denial or an attempt to claw back the claim since they already paid it out. They are based on the number of employees listed on the 941. You have a claim for $70,000.
It was 10 employees, 7,000 each. But one of the employees leaves the second to last pay period of the quarter. Then you list nine employees on the 941. You're going to get a notice that says, whoa, whoa, whoa, the maximum credit that you can claim is nine times 7,000 is 63,000. You claimed 70, but you only had nine employees, so you're going to owe us seven grand back. That's what these notices are about. You can multiply that by 10.
Oh, you had 100 employees, and we think you only had 99 employees, so give us back 1% of your claim. Those notices are, I would say, very frustrating, because just because you say you have nine employees at the end of the quarter does not mean you didn't have 10 during the quarter. The fact that the IRS is sending out these notices for small adjustments when it's off by 2%, 5%, this is peanuts. It's not somebody who claimed 300 employees, and then they listed that they had 10 on their 941.
That's not who's getting the notice, it's the people with just nominal little differences. You have to appeal those, and when you do, you need to submit, the IRS has been clear, you just want to submit as much information as you possibly can, show all of the math, show them the PPP loan, show them why they qualified, give them all that stuff, and send it in. I've been doing that for the last eight months. I've not seen a single one of them be processed.
That's terrible.
The second notice you can get is probably the worst, is a 105C letter. That comes before they process, and that is the full denial. That's the notice that says, we got your 941-X, we don't think you qualify. We are denying your entire claim. Again, you got to appeal those with all the information. Show your math on the PPP loan allocation, the wages by employee, the gross receipts test. You got to attach the P&Ls, go all out on those.
Again, the first one of those I had was, I think seven months ago, nata.
Still nothing. Chris Wittich: Oftentimes the response to those is like, well, yeah, they qualified on gross receipts. It's not that hard. I've had one where it was partial restriction, the government orders. We attached the government orders and an explanation of the business and trying to get them to understand what they do. I would say I'm very optimistic all these appeals will get approved. I think we've provided absolutely everything they've asked for. But I've seen no action on any of them.
The third notice is a 106C. Those are partial denials. They usually come out before the claim is processed. Those partial denials tend to be related to, they don't think there's just enough gross wages to support your claim. I think it's computer algorithms that kicking it out. We've seen only a few of those, and they haven't been correct either, and often they've been for very small amounts.
I had one. It disallowed something like $10, and we're like, I don't know what's going on here, but we're not going to appeal it, because I know it's going to take a year to appeal this. So we just let it ride and the client got a $10 adjustment to their claim. We have no idea what caused it, but it wasn't something we were going to fight, so we just let it go.
Again, on those, you need to appeal it, show all the information, show all the wages, the reason they qualified, but we've seen no action on a single appeal in the last eight months. The other thing we've seen a lot very recently is they'll get a 6577 notice, we will appeal it, and two months later, they will get a balance due notice from the IRS. That just totally ignores the fact that we submitted an appeal. They'll just get a notice. It's like, you owe us the seven grand then, plus interest.
We're like, no, no, no, no, we appealed this. You got to put this account on hold. We're sending lots of those letters right now, which are in response to the CP220 notices that just say, hey, you owe seven grand. That's incredibly annoying and frustrating. I got the denial 6577. I appealed it right away. Then two months later, they just get a balance due notice anyways. You call the IRS and they're like, we haven't processed your appeal yet, and don't even have it logged in the system.
It's just a nightmare when you get a notice. I feel maybe like your clients. Everybody's dealing with the same things. It's just a pain point across the board if you dealt in this space. Hopefully you feel some solidarity a little bit. I think that's the best we got. Let's pivot a little bit. We're wrapping up. Chris, so grateful you sat down with me, and today is March the 13th. Let's give a little shout out to Chris, two days before the deadline.
I know you've been on this podcast many times, and I'm so appreciative of that. We usually get a question about Tax Section Odyssey. We're on journey together towards a better profession. Today, I'm going to pivot a little bit and ask you rather not about your travel journey, Chris, but I'd like to hear what you're maybe up to that you might want to share with our listeners.
What I'm up to?
I thought you wanted to talk about your podcast.
Yes, I do have a podcast. It's called Traction With the Tiger. We do EOS here at the firm. It's like a EOS meeting, a L10 meeting. It's a little strange format for podcast, and they come out about every two weeks or so.
We'll probably put a link in the show notes. So if you want to check out Traction with the Tiger, you can also watch it on video, which I'm not brave enough to do quite yet, but maybe one day. You never know.
Then you'll have to turn on your video.
I know. Thanks again, Chris. Good conversation, even if it was a little bit of a Debbie downer, ultimately. Again, this is April Walker from the AICPA Tax Section. This community is your go to source for technical guidance and resources designed especially for CPA tax practitioners like you in mind. This is the podcast from AICPA and CIMA together as the Association of International Certified Professional Accountants.
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