ERC reported as income.

Technical topics regarding tax preparation.
#51
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duplicate post
Last edited by gatortaxguy on 2-Jun-2023 7:53am, edited 1 time in total.
Steve
 

#52
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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.
Steve
 

#53
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gatortaxguy wrote:

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."
 

#54
TheGrog  
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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'.
 

#55
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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.
 

#56
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philly wrote: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?
 

#57
philly  
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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?
 

#58
KoiCPA  
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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.)
Last edited by KoiCPA on 6-Jun-2023 11:30am, edited 1 time in total.
 

#59
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KoiCPA wrote: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...
 

#60
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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.
 

#61
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I still don't see the ambiguity. The distinction between similar and the same is the proverbial distinction without a difference. The only adjustment I see is to the compensation deduction. What authority is there for taking it into income instead?

The CAA of 2021 changed the rules retroactively. It's quite complex, but it seems to me the basic rules were in place before the 2021 return due date. So I am still wondering why so many are handling it in 2023 instead of 2022. It feels like there must have been some sort of systemic issue. Or was it just too complicated and could be delayed without much adverse consequence.

What is the authority for requiring a week-by-week computation? (I'm imaging that if it were as difficult as it sounds and I were a preparer I would have taken a practical approach and made a good faith estimate.)
Steve
 

#62
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I still don't see the ambiguity. The distinction between similar and the same is the proverbial distinction without a difference.


When the IRS created the “same” rule instead of a “similar” rule, that’s just grounds for attacking what the IRS did. But even if, arguendo, that point has no merit, such that “same” does mean “similar” – as you suggest - it doesn’t otherwise nullify what the actual statute allows, which is the application of a “similar” rule. That is, “similar” also means “similar.” So if a taxpayer wants to use a “similar” rule he is certainly within his rights to do so, as per the statute. Even if a court agreed with you that “same” means “similar,” such that what the IRS did was consistent with the statute, that just means the IRS’ position was consistent with the statute. Conforming with that position will keep you safe, as in a safe harbor. It does not mean that it is the exlusive way to comply.

What authority is there for taking it into income instead?


One’s accounting method for one thing. The tax benefit rule for another. These are imbedded, sound general tax principles that take precedence over a position in an IRS Notice that ignores the timing issue. Before a taxpayer goes to reduce his deduction, he already has taxable income by virtue of the ERC cash “receipt.”

Seems the IRS’ position is at odds with general tax principles. Does the IRS’ position nullify and over-ride these general tax principles? We are dealing with a refundable credit here…and one that does not diminish one’s federal income tax liability (which isn’t deductible in the first place).

Now you tell us: Where is the IRS guidance that says the receipt of the ERC funds *isn’t* taxable?

So I am still wondering why so many are handling it in 2023 instead of 2022.


Because it takes a long while to digest the material in the first place, including figuring out if you qualify. And then it takes a while to work up amended 941’s. Then you have to file them. Then the IRS has to process them. Then hopefully you get the refund you were expecting. Are you going to file your original return and reduce wages prior to receiving the refund? Some folks did that. But I can see why a bunch of people didn’t want to.

Here’s some of the history:

https://www.meadenmoore.com/blog/tax/hi ... ion-credit

Finally, it sure seems like you’re the only person on this Board who thinks all of this could have been accomplished by the return’s due date. Notice 2021-49 was issued on 8/4/21, just in time for the 9/15/21 and 10/15/21 deadlines for 2020 extended returns. Nice timing. But I’m sure some practitioners got to this stuff between 10/15/21 and 12/31/21. And then the claim is filed…and chances are, no refund by 3/15/22, the 1120S and 1065 due date. And don’t forget: We weren’t sure if the IRS was done issuing ERC guidance until eventually they came out and told us so. Added to all this mess is the fraud. While expected and not unusual, it delays refunds.
 

#63
philly  
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The present situation is the amending of many returns for the ERC refunds and the additional work for the IRS processing the amended tax returns.

Is the IRS considering changing their position and have the taxpayers report the income when the ERC refunds are received as opposed to the amending of prior year returns?
BTW I emailed, mailed and called my congressman. No response !
 

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