I do not know what other people in the group are thinking
I’ll tell you what I’m thinking: The implementing legislation (the Cares Act) said this:
(e) Certain Rules to Apply.--For purposes of this section, rules similar to the rules of sections 51(i)(1) and 280C(a) of the Internal Revenue Code of 1986 shall apply.Well, that rule involve claiming a credit on the same tax return where the wages are shown. To your point, seems very unreasonable to apply the “same” rule to the ERC situation, where we have an income tax return (with the wages) and a Form 941X (with the credit claim). Two different tax returns. Yet, IRS guidance (which was in a Notice only) didn’t directly address the Congressional mandate. Rather, the IRS Notice applied the SAME rule to the ERC situation, which is an entirely different animal. An animal that involves two tax returns and not one. An animal that kept changing – initially, we were told you didn’t even qualify for the ERC if you received a PPP Loan. I could go on. Anyway, it seems to me that reporting the refund in the year received is “similar” to disallowing a deduction.
Also, amended returns are not required, as we all know.
And finally, how is the IRS going to police this? Do they even have the capability? Are they expecting an amended return from your client? How do they know that your client didn’t already reduce wages on his original filing? Some people, you know, actually booked up a Receivable and credited wages before getting an answer on the ERC claim. Will the IRS match filed and amended 941’s to the wage number on the original income tax return? What would happen if you report the refund as income in the year of receipt, but a prior return gets audited (the one with the relevant wages)…and you tell the IRS, “I reported the refund in 2022. I’ll sign a closing letter saying I won’t amend the 2022 return (to remove said refund income) if you let this go without having me file an amended return for the prior year. I offer this up because we’ll end up in the same place. If we do it your way, I owe tax for the prior year, plus interest. Then I’ll get a refund for 2022 when I amend that return, plus interest. If we do it my way, we don’t have to go through this exercise amending returns and wasting valuable IRS resources.” Maybe they’ll say, “Fine.” If they don’t say fine, then it seems we have a bona fide dispute about what “similar” means, whether or not the Congressional mandate was followed, and the real authority of the IRS Notice.
I also wonder this: What if you don’t amend a prior year return (to reduce wages), but you don’t report the refund as income either? I have a sneaking suspicion that if SOL has run on the prior income tax return, the IRS will come back with something like, “Well, you’re on the cash basis of accounting. Amending the prior year income tax return wasn’t the only way to fix the situation. Since you didn’t amend and reduce wages, the refund is taxable in the year of receipt.” And note: This SOL issue is highly relevant. You could file an ERC claim at the very last minute. But by the time it gets processed, the SOL on the income tax filing has expired. Did the IRS even think about this possibility? I know there’s a special SOL with certain ERC claims, but I’m pretty sure that doesn’t apply to the related income tax return.