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Tag: erc

What the ERC Pause Means for Small Business Owners

Posted on September 26, 2023 - 2:52 pm by

When properly claimed, the Employee Retention Credit (ERC) is a refundable tax credit designed for businesses and tax-exempt organizations that continued to pay their employees while experiencing workforce disruptions due to the COVID-19 pandemic. Unfortunately, the intricate filing process associated with this credit inadvertently created an opportunity for corrupt specialty firms to prey on small business owners, making deceptive claims about eligibility. 

With the rise in fraudulent ERC claims, the IRS announced an immediate halt to processing new claims through at least the end of the year. IRS Commissioner Danny Werfel states, “The IRS is increasingly alarmed about honest small business owners being scammed by unscrupulous actors, and we could no longer tolerate growing evidence of questionable claims pouring in.”

Depending on your filing situation, we’re going to cover what to expect and what you should do next as a small business owner. 

What if I have already filed an ERC claim?

If you have already filed an ERC claim, the IRS will continue to process your claim, but at a greatly reduced speed. The IRS will be reviewing more than 600,000 claims, so expect processing times to be 180 days (about 6 months) or longer. The IRS may even ask for more information, so be prepared to receive this request. 

If you believe that your claim is fraudulent, the IRS is working on offering a withdrawal option for those who have filed an ERC claim but have not yet had it processed. As cited by the IRS, “This option, which can be used by taxpayers whose claim hasn’t yet been paid, will allow the taxpayers, many of them small businesses who were misled by promoters, to avoid possible repayment issues and paying promoters contingency fees.” However, if you have willfully filed a fraudulent claim, withdrawing it does not exempt you from potential criminal investigation. 

In the event that your ERC claim has already been processed and you have received an improper ERC payment, you are required to pay it back with possible penalties and interest. Per the IRS, they are “developing new initiatives to help businesses who found themselves victims of aggressive promoters. This includes a settlement program for repayments for those who received an improper ERC payment.” Remember, this program is not finalized, but the IRS plans to release more information in the fall. 

What if I am in the process of filing for the ERC?

The IRS encourages anyone being pressured by promoters to apply for the ERC “to immediately pause and review their situation while we (the IRS) look to add new protections and safeguards to stop bad claims from ever coming in.” Commissioner Werfel also states, “Businesses should seek out a trusted tax professional who actually understands the complex ERC rules.”

This would also be a good time to review the IRS list of red flags when it comes to aggressive ERC promoters as well as the IRS ERC eligibility checklist. 

What are my next steps?

Considering the complexity of the ERC, it’s never been more important to partner with a trusted tax professional. As small business owners ourselves, we know how scary this situation can be, but you don’t have to face it alone. At Padgett, we prioritize our relationships with our clients and are here to help you every step of the way. With over 50 years of collective experience and expertise in filing ERC claims, we’re prepared to answer any questions you may have regarding your ERC filing status. Connect with us today for reliable guidance and advice. 

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The Burden of ERCs on Tax Professionals

Posted on September 11, 2023 - 7:32 pm by

The COVID-19 Employee Retention Credit (ERC) program has provided a lifeline for many businesses. However, questionable claims and muddy guidance have made ERCs a major burden for tax preparers and advisors trying to serve clients. On a recent Federal Tax Updates podcast, Padgett hosts Roger Harris, EA, and Annie Schwab, CPA discussed the key challenges ERCs create for their profession. Indeed, since the podcast was published, the IRS has put out a significant announcement placing a moratorium on ERC claims through at least the end of the year. While a positive step, it is just another layer of complexity to this credit.

Dealing with Fraudulent ERC Claims

A major difficulty is clients coming in with potentially fraudulent ERC claims obtained through “mills” aggressively promoting the credits. As Schwab notes, these preparers must tread carefully: “The IRS has been very clear to tax practitioners that they should not perpetuate the fraud and that we should not amend a return for credit that we believe or know to be illegitimate.” (00:22:07) Verifying murky eligibility criteria and documentation from mills becomes a messy, risky process.

Fixing Incorrect ERC Claims

Even with legitimate credits, untangling convoluted calculations done by mills creates headaches. As Harris explains, “You got to amend the partnership return for 2020. The partnership return for 2021. Sixty-five partners have to amend their return for 2000. Sixty-five partners have to amend their return for 2021. That’s 130 returns for one credit.” (00:43:22) Recreating records and amending multiple returns devours huge time.

Advising Clients on ERC Issues

Guiding clients through ERC pitfalls also frustrates advisors. Schwab notes the bind of telling clients credits are invalid: “I’m going to have to send this client away. And now I’ve lost a good client because they were misled by a mill.” (00:22:07) With evolving IRS rules, providing accurate guidance becomes precarious.

Evolving Guidance Complicates Matters

Indeed, shifting ERC guidance itself also burdens preparers. As Harris says, “What you told the client on Monday might be different than what you tell them on Tuesday because you have more information.” (00:49:34) Absorbing complex new IRS rules strains resources. Meanwhile, clients seek simple, concrete answers.

In summary, questionable claims, workload headaches, client conflicts and swirling guidance have made ERCs a bear for tax professionals. As Harris emphasizes, “This is probably worse than how do I get it and why did it take so long? Because there’s more potential problems.” The impact of ERCs continues as a painful thorn in the side of preparers.

Get ERC Help from the Experts

If you’re a tax pro struggling under the burden of Employee Retention Credits, Padgett’s dedicated ERC team can help. Members of our franchise network have received ERC support since day one. From validating claims to managing audits and advising clients, we have the expertise to guide you through the maze. Contact us to learn more about our tax support and more for tax and accounting firms.

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What is an IRS audit, really?

Posted on May 10, 2023 - 9:28 pm by

Especially since the passing of the Inflation Reduction Act that provided $80 billion in funding to the IRS, many small business owners have been concerned about the possibility of having their finances audited. While most of the funds are dedicated to improving taxpayer services, it is true that some of the funding will be used for enforcement and audits.  

So, what does that mean for your business, and how can you avoid being audited in the future? 

What is an IRS audit? 

An IRS audit is an examination of your tax returns, financial records, and other documents to ensure that you have reported your income and deductions accurately and in compliance with the tax laws. Receiving an IRS notice doesn’t mean you’re being audited, and an IRS audit is not the same as other types of business reviews. An IRS audit is conducted by the government, and it can result in penalties, interest and even criminal charges if it uncovers fraud or other serious issues. 

But don’t panic—audits are not a common occurrence. Last year, only 0.38% of returns were audited by the IRS, according to USA Today. It’s also unlikely that taxpayers making less than $400,000 in annual income will be targeted for audits. 

What are the different types of audits? 

While the prospect of an IRS audit may seem daunting, it’s important to remember that not all audits are created equal. There are several types of IRS audits that you may encounter as a small business owner. Here are the most common ones: 

  1. Correspondence Audit: This is the most common type of audit, and it can be conducted entirely by mail. The IRS will request specific documents or information from you, and you will have a deadline to provide the requested materials. This type of audit is usually focused on a single issue, such as a missing tax form or a discrepancy in reported income, and most commonly occurs with charities and nonprofit organizations. 
  2. Office Audit: An office audit is conducted in person at an IRS office. During an office audit, an IRS agent will review your financial records and ask you questions about your tax returns. This type of audit is typically focused on one or two specific issues, such as a deduction that the IRS believes may not be valid. 
  3. Field Audit: A field audit is the most comprehensive type of audit, and it involves an in-person visit from an IRS agent to your place of business. During a field audit, the agent will review all of your financial records and ask you questions about your business operations. This type of audit is usually reserved for larger businesses or more complex tax issues. 
  4. Taxpayer Compliance Measurement Program (TCMP) Audit: This type of audit is relatively rare, and it is typically used to measure compliance rates across a larger population of taxpayers. The IRS will select a random sample of your returns and conduct a comprehensive audit of those returns to measure your compliance with the tax laws. 
  5. Specialized Audit: A specialized audit is conducted by an IRS agent with expertise in a particular area, such as international tax issues or employee benefit plans. These audits are typically reserved for businesses with complex tax issues that require specialized knowledge. 

Note: Beware of scam calls impersonating the IRS! If you are selected for an audit, the IRS will only notify you by mail, not by telephone.  

What should you do if you’re audited? 

No matter the type of audit, you have the right to be represented by a tax professional, so make sure you choose one who is qualified to represent you. If you are notified of an IRS audit, it’s important to respond promptly and professionally. Ignoring or delaying an audit can only make the situation worse. Instead, gather the requested documents and information and work with your tax professional to respond to the IRS’s requests. 

It’s also important to remember that an audit does not necessarily mean that you have done something wrong. The IRS uses algorithms to screen returns for potential red flags and sometimes selects random returns for closer review. However, the IRS has stated it will be auditing more employment tax returns in the future because of the possibility of false or incorrect Employee Retention Credit (ERC) claims. If your business has received this credit, make sure to have all the necessary documentation, like employee, wage, and eligibility information, to support the claim under audit.  

If you have been selected for an audit, it’s not necessarily a reflection of you or your business. That being said, there are steps you can take to reduce your chances of being audited. First and foremost, make sure that you are reporting your income and deductions accurately and in compliance with the tax laws. By maintaining accurate records, reporting your income and deductions correctly, and working with a tax professional throughout the year, you can reduce your chances of being audited in the future. 

If you need a tax professional, Padgett can help! Contact your local office today.

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10 reasons your 2022 tax refund may be lower

Posted on March 9, 2023 - 7:23 pm by

Have you already filed your 2022 tax return? If so, you may have noticed that your refund is lower than it was in 2020 or 2021. As we return to the “new normal” after the COVID-19 pandemic, many tax credits and deductions from the last two years are no longer available in tax year 2022. This may be contributing to a smaller tax refund or a larger balance due.    

Here are some of the key differences to keep in mind.

For individuals:

  • Economic Impact Payments (EIP): Also known as stimulus checks, EIPs were not issued to taxpayers in 2022. You likely claimed a tax credit on your 2020 or 2021 tax return if you were eligible for a stimulus payment but didn’t receive it.   
  • Child tax Credits: For 2022, the credit is now worth $2,000 per child, down from $3,000 per child and $3,600 for children under age six in 2020 and 2021. This credit now ends when your child reaches age 16 rather than 17. This could further reduce the amount of credit you receive.  
  • Child and Dependent Care Assistance Credit: In 2021, this credit was refundable and taxpayers whose adjusted gross income (AGI) was less than $125,000 were eligible for the maximum credit of 50% of eligible expenses paid. In 2022, the maximum percentage dropped to 35%. The full credit is only available to taxpayers with AGI $15,000 or less. The credit is now nonrefundable, meaning it’s limited to the amount of tax you owe. 
  • Earned Income Tax Credit: This credit has reverted to pre-pandemic rates of 7.65% instead of the increased amount of 15.3% in the last two years. The eligibility ceiling has also decreased to $7,320.  
  • Charitable contributions for non-itemizers: In 2020 & 2021, a $300 per person deduction was available to taxpayers who made a qualified charitable donation and did not itemize. For 2022, only taxpayers who itemize can deduct charitable donations. 
  • Employer-Provided Child Care: This year, only $5,000 in employer provided childcare is excluded from your taxable income on the Cafeteria Plan. This is a decrease from the $10,500 that was excluded from income in previous years. This means more of your income is taxable in 2022, which could result in a lower tax refund. 
  • Healthcare Premium Tax Credit: This is another credit that has reverted to pre-pandemic rules. In the past few years, the credit expanded, allowing individuals on unemployment to qualify. However, in 2022, the eligibility is based on household income in comparison to the federal poverty limit. If you were eligible for the credit before, your eligibility may have changed. 

For businesses:

As a business owner, you may also face an increase in taxable income from your business activity. There are a few reasons for this, including: 

  • COVID-19 Employer Payroll Credits and loan forgiveness (including Employee Retention Credits, Paycheck Protection Program and Paid Sick and Family Leave Credits): During the pandemic, several credits, loans and benefit programs were available to businesses. In 2022, many of those pandemic relief efforts have expired.  
  • Business Interest Expense Limits: The calculation for the limitation has changed in 2022 and may result in less of a deduction for interest expense.  
  • Corporate charitable deduction limits: The charitable contribution limit has reverted to pre-pandemic rules. In 2022, corporations are limited to a charitable deduction of no more than 10% of their taxable income. This is down from the 25% limit imposed in 2020 and 2021.  

Are you unsure you’re getting your maximum tax refund or feeling surprised by your tax results? That may be a sign that your tax professional isn’t right for you. Padgett’s nationwide network of CPAs and EAs can help, so find a location near you today! 

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