ERC reported as income.

It would be so much less work if the IRS would just say report the ERC income in the year it was received. I have 50 2021 returns to amend in the next few months. I guess the IRS hired 80k plus agents to review all of the submitted amended tax returns-LOL

ERC did not change the ethical rules. So I don't see that the instant issue is fundamentally different than typical ethical issues involved in the decision to amend a return. In the end it's the client's decision whether to amend. So from that perspective I consider it unethical to intentionally mislead a client into thinking amending is required (i.e., as if it were a matter of law.)

The law requires us to file returns and pay taxes. It does not require filed returns to be amended. Clients are well within their rights in declining a preparer's advice to amend. And preparers are within their rights to fire the client for not following the preparer's advice. Under the circumstances, it breaks down to a cost/benefit decision. So drawing the line in the sand and firing a client for not amending strikes me as losing sight of one's role.

People who computed the credit amount up front didn’t have to amend income tax returns.

True. But they paid less payroll tax upfront, and got a smaller payroll tax deduction which equates to higher taxable income.

But they paid less payroll tax upfront, and got a smaller payroll tax deduction which equates to higher taxable income.

My point was with reference to IRS identifying non-compliant taxpayers: Those who filed amended payroll reports, but no amended income tax returns. Those taxpayers may have actually reduced wages on original income tax filings. So the notion that a non-compliant taxpayer is one filed amended 941’s, but not amended income tax returns, isn’t entirely accurate. There would need to be an added step, but even that isn’t foolproof. IRS would need to look at dates of filing. But it’s not foolproof because the taxpayer may have computed the ERC refund(s) prior to filing the related income tax return and may have reduced wages on the original filing. To see if that taxpayer reduced wages on the original filing, IRS would need to look at the M1 on the income tax return. A lot of work, when millions of ERC claimants are involved. Even more so when paper income tax returns were filed. An easier route would be to start the process with a Form Letter.

Why are the fees for this so high? It looks simple to me. It also seems like the businesses profiting so much from this work are just doing what should have been done already. Further, it seems like the IRS could easily identify the excess deductions via a computer program and then send an audit letter to each identified TP. Finally, 3134 gives the ERC and reduces the deduction, all in one statute. So I don't see an excuse for not reducing the compensation deduction while claiming the ERC, and thus a negligence penalty would be proper. Finally, I don't see that any of this involves the 6 year SOL.

So from that perspective I consider it unethical to intentionally mislead a client into thinking amending is required (i.e., as if it were a matter of law.)

I was thinking the same thing.

And if Steve’s interested, the meat of the issue is laid out in Post #14. The statute [Sec 3134(e)] has the one sentence, that’s it. So we await the “similar rules” the statute references. Or do we? Has it been left to the taxpayer to decide what “similar rules” to apply? Hard to say. But if the IRS wants to craft similar rules, they can have at it. So far, all we’ve gotten is a Notice:

https://www.irs.gov/pub/irs-drop/n-21-49.pdf

…which says stuff like this:

When a taxpayer claims the employee retention credit because of the retroactive amendment of section 2301 of the CARES Act by section 206(c) of the Relief Act (relating to eligibility of PPP borrowers to claim the employee retention credit) or otherwise files an adjusted employment tax return to claim the employee retention credit, the taxpayer SHOULD file an amended federal income tax return or administrative adjustment request (AAR), if applicable, for the taxable year in which the qualified wages were paid or incurred to correct any overstated deduction taken with respect to 25 those same wages on the original federal tax return.

Interesting. We have a Code Section using the word “shall,” but an IRS Notice that uses the word “should.” IRS is in a bit of a conundrum with this one, since the path the IRS took involves no requirement under the law (amended returns are not required), yet Sec 3134(e) requires similar rules (similar to 51 and 280C) be applied. But I get it: IRS would just say the “should” means “should” and if you choose not to amend, the IRS can assess tax for a prior year, the year in which the wages were paid. And then we’d make our case. And say things like the “similar rules” called for by the statute isn’t quite what the IRS cooked up in the Notice. What the IRS cooked up was an identical rule. We might even say the word “should’ is permissive, leaving open other options. And so on.

I also liked this sentence in the Notice:

Under section III.L. of Notice 2021-20, a reduction in the amount of the deduction allowed for qualified wages, including qualified health plan expenses, caused by receipt of the employee retention credit occurs for the tax year in which the qualified wages were paid or incurred.

Something’s not quite right about the logic. But I can see it as being an option.

Finally, 3134 gives the ERC and reduces the deduction, all in one statute.

What you’re missing is that the “giving of the ERC” comes much later (as a cash refund) than the filing of the income tax return on which the wages were reported. This is unlike all the other credits for which the wage reduction rule applies. And it’s because the IRS kept changing the rules, well after income tax returns were filed.

Further, it seems like the IRS could easily identify the excess deductions via a computer program and then send an audit letter to each identified TP.

I don’t think it’s that simple. You’d have to explain how the IRS would identify the excess deductions. That would involve some kind of matching between 941’s and, say, an 1120S. IRS would have to take the 941’s and modify the wages down for the credit. And then they’d need to compare to the income tax return. You also have cash/accrual issues on an income tax return (accrued wages on the income tax return vs paid wages on the 941’s). You also have deducted wages being different than 941 wages for things like capitalization of wages. You also have deductible wages being different than 941 wages, for starters, because of pre-tax deductions. Form 940 could possibly be of assistance to the IRS for this purpose.

Why are the fees for this so high? It looks simple to me.

Not really. In addition to the IRS continually changing the rules, the rules are complex. This is why so many outsource firms came into being – many CPA’s, EA’s, etc. (including our firm) did not want to learn this mess and deal with it.

So I don't see an excuse for not reducing the compensation deduction while claiming the ERC

See above. It is a **** ton of work to back and amend a pass-thru return and then amend the related partner returns to a reduce a deduction. Especially if we’re talking about a partnership return. When the fact is, we could get to the same theoretical place, without screwing the government, and without screwing the client on our fees, by simply reporting the cash refund as income in the year of receipt.

Good posts, but I don't see an ambiguity in the statutes.

And I suppose I'm missing something, but I don't see a reasonable cause defense to income tax penalties with or without filing a 1040X.

From my perspective the law was clear well before the 2021 filing due date. So it seems to me that we're talking about preparer screwups for not reporting the ERC and matching deduction offset on the 2021 returns. Preparers who did not claim the ERC should be proactive. Otherwise they should not be surprised that their clients responded to the ERC ads.

As an aside, what's all this say about the ERC internet advertisements I'm hearing? They remind me of all the IRS collection ads I've been hearing for years. It's anecdotal evidence, but the clients I've picked up after they lost their money on one of those collection services complained about a lack of communication once they paid the fee. At least with the ERC ads the fee is contingent. The bottom line is that the ads (including attorney/accident ads) make sense from a business perspective because the excessive profits arise from getting clients.

it seems to me that we're talking about preparer screwups for not reporting the ERC and matching deduction offset on the 2021 returns.

And 2020?
Originally, you couldn't get ERC if you got PPP money. Then that changed. 2020 returns were already filed.

I just completed ERC claims for 2020 and 2021 for a client. I will prepare amended 2020 and 2021 1120S and 1040.
I don't think I screwed up.

I don't understand where the thought that these are "preparer screwups" comes from. I've prepared four ERC claims for 2020/2021 in this calendar year. They will go back and amend their income tax returns to account for this dynamic. No one has made an error in any of these instances. These clients were unaware they were eligible or hadn't responded to prior requests to evaluate their eligibility.

From my perspective the law was clear well before the 2021 filing due date. So it seems to me that we're talking about preparer screwups for not reporting the ERC and matching deduction offset on the 2021 returns. Preparers who did not claim the ERC should be proactive. Otherwise they should not be surprised that their clients responded to the ERC ads

No, you don’t understand. You’re missing a lot.

duplicate post

I have zero experience with ERC. My comments are based on a simple reading of the statutes. I see that the amending issue is quite common, which tells me I'm probably wrong. Please inform me, with particular reference to why this problem is being addressed in 2023 instead of 2022.

I'd also like to know what is so complicated that specialists are getting paid so much.

I'd also like to know what is so complicated that specialists are getting paid so much.

In some cases, the term "Specialist" is not entirely accurate. I prefer "Con merchant" or "Scam artist."

ERC calcs are easy, UNLESS they had a PPP loan. Then things get very tedious since to maximize benefits you have to go week by week, employee by employee.

Evaluating eligibility can be hard too, but the real reason fees are so high on this work is that people hear 'free money' and stop thinking. Doubly so when the business in question doesn't actually qualify and they've already been told so by their tax preparer. "I can get 75-80% of this money, or 0%" is what they think.

As a practical matter I completely fail to understand the IRS's stance on this. Are they bound by some odd points of law? Did the people who wrote the guidance just not consider what a disaster the process is? Reporting the reduction in wages as the money comes in makes it just so much easier to deal with, and easier to catch businesses that did not report it.

My boss is part owner and on the board of a payroll & benefits company. They absolutely did not qualify. No rev reduction, closure didn't affect them since they weren't open to the public anyway and people worked from home. The mill said they qualified based on the difficulty in getting cleaning supplies! When my boss grilled the lawyer about the consequences of it being denied later, they said 'that's what E&O insurance is for'. The mill claimed the engagement letter included a section that the mill would make the company whole if the credit was denied that we were intensely dubious of. I know other mills have had various forms of such guarantees written in seemingly deceptive wording that would boil down to 'well, you told us that you qualified'.

So instead of telling me I'm missing a lot, I'd appreciate your telling me what I'm missing.

It’s already been explained. See Posts #10 and #14, for example:

First of all, this credit is unlike the other credits covered by the “reduce your wage deduction rule.” For those credits, you claim them on the income tax return. (Adjusting wages in that case is real easy, since the credit and the deduction take place on the same document). Not so with the ERC, which involves amending 941’s. Despite this major difference, things would nonetheless be well and good if the ERC was fixed into law and we knew about it when we filed our income tax returns. But that was not the case. It was a brand new credit that came about because of the pandemic. And, we were first told you wouldn’t get the credit if you got the PPP. So we filed income tax returns. Then that rule changed. So people had to amend 941’s, get refunds therein, and then deal with a retroactive wage reduction on an income tax return that had already been filed. And from there, the rules kept changing, including the quarters in which you’d qualify for the credit, whether or not you qualified, etc. So, this was (1) a brand new thing (2) the rules kept changing (3) the credit was claimed separate from the income tax filings [unlike all the other credits subject to the wage reduction rule]…and meanwhile, we had income tax returns that were due and needed to be filed. You have the additional issue of actual receiving a cash refund – should you file a return, or an amended return, not knowing if you’ll actual get the cash refund? What if you do that and then the cash refund is different than what you thought it would be?

That’s the background.

And I disagree with you that the statute is clear and unambiguous. The statute calls for “similar” rules. If we take the IRS Notice as law, the IRS didn’t create similar rules – they created an identical rule. And if we take the Notice for what it really is – nothing authoritative – this means there are no rules as to the duplicative benefit aspect. I can see how the statute makes sense on a go-forward basis: That is, if we all know about the ERC now – say for 2022 – we could easily adjust wages on the 2022 return and work up the credit claim at the same time. We know how the credit works now. Thus, the ERC would operate like any other credit subject to wage reduction. However, the ERC expired, so there is no go-forward value to the ERC statute.

As I said in a prior post, the IRS’ position in the Notice was unthoughtful. They’ve just created a massive amount of work for practitioners and the IRS alike. Wouldn’t it be far easier to report the credit as income upon receipt? Yes, it would. With no financial loss to the government.

As a practical matter I completely fail to understand the IRS's stance on this. Are they bound by some odd points of law? Did the people who wrote the guidance just not consider what a disaster the process is? Reporting the reduction in wages as the money comes in makes it just so much easier to deal with, and easier to catch businesses that did not report it.

Agree with you 100%. The IRS is indeed bound by the statute. But as I have pointed out several times, the statute calls for “similar” wage reduction rules. Given the uniqueness of this situation, the IRS could very well have said: Do it either way – reduce wages or bring into income based on your accounting method. That is, make it elective. Isn’t that what they did with the PPP when there was a timing issue as to forgiveness recognition?

And IRS woud have been well within it’s authority to interpret “similar” in the above fashion. They could have even nuanced it and said, “If you filed the 941 claim prior to filing the related income tax return, you are forced to reduce wages on the income tax return.” And for everyone else, take your pick.

At the end of the day, I slightly blame Congress for not thinking this through more thoroughly. But I more blame the IRS because they could have easily resolved it. Like I said before, IRS approach here was lazy and unthoughtful. Also at the end of the day, remember we are dealing with an IRS Notice here. Even if we accept the Notice, that doesn’t mean it is the exclusive way forward.

This is the E mail that I sent my congressional representative.

Many small businesses across the country have applied for the Employee Retention Credit by amending payroll tax form 941 for previous years. The purpose of the credit was to help small business during the COVID due to loss of revenue. IRS notice 2021-49 requires a business to go back and amend prior year income tax returns by reducing payroll expenses by the amount of the ERC credit amount. The result is a business received the ERC money in 2022 or they are still waiting for the IRS to process the refund claim in 2023 and they have to go back to 2021 for example and amend the income tax returns, pay the tax with penalties & accrued interest. Amending prior year years will also result in additional professional fees to be paid by a small business.

The purpose of the credit to begin with was to help and not hurt small businesses that suffered during the COVID.

Please contact me concerning this issue.

I'm curious philly -- did you ever receive a response?

I have tried to explain to several clients that we have to go back and amend a prior year return which would be subjected to interest and maybe penalty. All of the clients replied, " I am on a cash basis why am I amending a prior year and paying interest & penalty I should report the income the year that I received it."
How do I explain to them the IRS position?

The IRS position is that they never had the expense in the first place.

It would be like a taxpayer who intentionally overpays his tax deposits. "Oops, I did my December EFTPS for 110,000, not 10,000. I'll just take the 110,000 as a tax expense this year, and then I'll show the 100,000 refund as income next year." If that was allowed, a cash basis taxpayer could shift income between years at will.

(Edited to add: not that I'm suggesting ERC is as abusive as the example, just that not all expenditures are expenses, even in cash basis.)

The IRS position is that they never had the expense in the first place.

Why in the world is this not treated similar to Claim of Right §1341 for income?

The income was received in a prior year and they believed they had an unrestricted right to it. In a future year it was discovered that they were not entitled to that income and had to pay it back. Claim a credit or deduction of the current year tax return.

How is this any different except with an expense that was legitimately deducted in the prior year when it was believed to be correct. It is only in a future year when it is determined that the deduction need to be reduced. So make the adjustment in the current year.

What a complete waste of time for such a simple fix...

How do I explain to them the IRS position?

The ERC Code Section requires rules “similar” to 51(i) and 280C to be applied. Those rules require a wage reduction for wages paid during YearX which factor into an ERC credit claim with respect to YearX. The IRS has taken the position that the word “similar” means “identical.”

I have tried to explain to several clients that we have to go back and amend a prior year return which would be subjected to interest and maybe penalty.

The client doesn’t have to go back and do anything. Amended returns are never required. What you should explain to the client is the IRS’ position, the weight of authority on which it is based and the risks invovled if the client decides not to amend and it turns out the IRS’ position is not only correct, but is the exclusive means of handling this situation. There is also the issue of this: If it comes down to it, and the client doesn’t amend, and the IRS makes an assessment against your client, yet the client still believes the IRS is wrong (or at least believes there is a supportable alternative to reducing wages in YearX, such as bringing the refund into income)…how far the client go will fight it. You might find that when client is presented with an assessment hypothetical he’ll say: “I wouldn’t fight it beyond filing a $60.00 TC petition, because actual litigation would cost too much money. Nonetheless, until then, I’m not going to amend.”

Another thing to think about is a possible negotiating tactic in the event of assessment. That is, instead of just saying, “I think we’re right and you, the IRS, is wrong” you might come back with, “The client reported the refund as taxable income in YearY. The client will sign a closing agreement as to YearY stipulating that client will not later amend that YearY return to take a position inconsistent with that original reporting.” And finally, one other thing to think about is the near future possibility of some other taxpayer getting an assessment, but he has deep pockets, so he decides to fight it…and it goes to court…and he wins. And that makes us wonder if such a case, assuming a well-represented taxpayer is involved, would even make it to court in the first place. That is, does the IRS believe that a judge would agree that an IRS Notice is the law of the land?

I can tell you one thing: If the IRS’ position was stated in a Proposed Regulation that involved a public comment period, the IRS would have gotten a lot of pushback.