ERC Claims & Penalty Relief

I have a 1040 client that went on extension with preliminary numbers from a partnership. They had an overpayment of $40K that we were rolling over to 2022 Q1. We reduced that Q1 payment, accordingly.

During the extension period, the partnership made an ERC claim. The K-1 now shows much more income than originally estimated. Their $40K overpayment is now a $10K balance due. They owe for 2021 and are underpaid for 2022.

Does the ERC penalty relief apply to both of these? Or does it only apply when there is a balance due on an amended tax return?

I think you'll have to request relief under reasonable cause, which you'll have a good chance of receiving

Thank you. That's what we will do.

Here is the IRS guidance for penalty relief on amending income tax returns due to ERC claims: https://www.irs.gov/newsroom/irs-remind ... ion-credit

...Taxpayers that claimed the ERTC retroactively and filed an amended income tax return reducing their deduction for the ERTC qualified wages paid or incurred in the tax year for which the ERTC is retroactively claimed have an increased income tax liability but may not yet have received their ERTC refund.

This release reminds taxpayers that, consistent with the relief from penalties for failure to timely pay noted in Notice 2021-49, they may be eligible for relief from penalties for failing to pay their taxes if they can show reasonable cause and not willful neglect for the failure to pay...

This is not blanket penalty relief. You still need to show reasonable cause. They sort of hint that that not yet having received the ERC refund is reasonable cause.

Is this enough to hang our hat on?

What if the client has sufficient funds to pay the tax despite not receiving the credit refund?

This is a follow up. The IRS did not allow relief for an underpayment of estimated tax penalty that was caused by the ERC.

For 2021 or 2022 or both?

2021 3/31/22 Corporate Tax Return.

Thanks for letting us know.

Not sure the IRS read & understood the abatement request. They sent a generic reply.

They may not have.
Did they give appeal/disagreement options?