Since July 2023, the IRS has taken a series of actions in response to what it has termed a “flood of ineligible claims” for the Employee Retention Tax Credit (ERTC). Most recently, it launched a Voluntary Disclosure Program (VDP). The program presents a valuable, but temporary, opportunity for eligible employers.

Flood of invalid ERTC claims

The ERTC is a refundable tax credit intended for businesses that 1) continued paying employees while they were shut down due to the pandemic in 2020 and 2021, or 2) suffered significant declines in gross receipts from March 13, 2020, to December 31, 2021.

With the credits worth up to $26,000 per retained employee, fraudulent promoters and marketers quickly pounced, offering to help employers file claims in exchange for large upfront fees or percentages of the money received. But the requirements for the credit are stringent, and many employers were misled into filing claims that have proven to be invalid, leaving those claimants at risk of liability for credit repayment, penalties and interest, as well as other tax problems.

IRS’s response

In the face of the deluge of invalid claims, the IRS intensified audits and criminal investigations of both promoters and businesses filing suspect claims. As of December 2023, it had more than 300 criminal cases underway with claims worth nearly $3 billion, and thousands of ERTC claims had been referred for audit.

The IRS also has instituted a moratorium on the processing of new ERTC claims. And, in October 2023, the agency began offering a withdrawal option for eligible employers that filed a claim but haven’t yet received, cashed or deposited a refund. Withdrawn claims will be treated as if they were never filed, so taxpayers need not fear repayment, penalties or interest.

In late December 2023, the IRS announced another ERTC relief initiative, the VDP. The program is intended for employers that claimed and received credit money but weren’t entitled to it.

VDP nuts and bolts 

Employers that participate in the VDP may benefit in several ways. For example, they’re required to repay only 80% of the credit received (if repayment in full isn’t possible, the IRS may authorize an installment plan). They also aren’t required to repay any interest received on an ERTC refund or amend their income tax returns to reduce wage expense.

These employers won’t be subject to penalties or underpayment interest if the 80% repayment is made before the signed closing agreement is returned to the IRS. The 20% reduction won’t be treated as taxable income, and the IRS won’t audit the ERTC on employment tax returns for the tax periods covered by the closing agreement.

An employer can apply for the VDP for each tax period in which:

• Its ERTC claim was 1) processed and paid as a refund that has been cashed or deposited, or 2) paid in the form of a credit applied to that or another tax period,
• It believes it wasn’t entitled to the ERTC,
• It isn’t under IRS audit for employment taxes,
• It isn’t under IRS criminal investigation, and
• The IRS hasn’t reversed, or notified the employer of its intent to reverse, the ERTC to zero (for example, with a letter or notice disallowing the credit).

Notably, the IRS is sending up to 20,000 letters with proposed tax adjustments for the 2020 tax year to recover ineligible claims, in addition to 20,000 denial letters it sent earlier. The agency continues to work on the 2021 tax year, with more mailings to come. When an employer is identified through this work as receiving excessive or erroneous ERTCs, the IRS will pursue normal tax assessment and collection procedures.

If a third-party payer filed an employment tax return that reported an employer’s ERTC-related wages and credits, the employer can participate in the VDP only through the third-party payer. It’ll be rejected if it applies with its own employer identification number.

Act now

Bear in mind that not every ERTC claim was invalid. If you’re at all uncertain about the validity of your claim, regardless of whether you’ve received payment, we can help you navigate this increasingly complex area of your tax liability. The VDP is open only until March 22, 2024, though, so don’t delay.

© 2024

Does your business file 10 or more information returns with the IRS? If so, you must now file them electronically. This is a significant rule change that went into effect on January 1, 2024, for 2023 tax year information returns.

The threshold for electronically filing most information returns has dropped from 250 to 10. Before the new rule, only businesses filing 250 or more information returns were required to do so electronically. Notably, the 250-return threshold was applied separately to each type of information return. Now, businesses must e-file returns if the combined total of all the information return types filed is 10 or more.

Final regulations on the new rule were issued February 21, 2023, by the U.S. Department of the Treasury and the IRS.

Affected information returns

The IRS reports that it receives nearly 4 billion information returns each year. And by 2028, the agency predicts it will receive over 5 billion information returns per year.

The final regs state that the new e-filing requirements will be imposed on those taxpayers “required to file certain returns, including partnership returns, corporate income tax returns, unrelated business income tax returns, withholding tax returns, certain information returns, registration statements, disclosure statements, notifications, actuarial reports, and certain excise tax returns.”

Here are just some of the forms involved:

• Forms 1099 issued to report independent contractor income, interest and dividend income, retirement plan distributions, prizes and other payments,
• Form W-2 issued to report employee wages,
• Form 1098 issued to report mortgage interest paid for the year, and
• Form 8300 issued to report cash payments over $10,000 received in a trade or business.

Note: January 31 is the deadline for submitting to the government W-2 wage statements, 1099-NEC forms for independent contractors and other forms. You can find an IRS guide to information returns and when they’re due here.

Penalties and exceptions

The IRS may impose penalties on companies that are required to e-file information returns but instead file them on paper. Filers who would suffer an undue hardship if they had to file electronically can request a waiver from the e-filing requirement by filing Form 8508 with the IRS. Contact us for more guidance on your information return filing obligations.

© 2024

If you’re concerned about your 2023 tax bill, there may still be time to reduce it. Here are four quick strategies that may help you trim your taxes before year end.

1. Accelerate deductions and/or defer income. Certain tax deductions are claimed for the year of payment, such as the mortgage interest deduction. So, if you make your January 2024 payment in December, you can deduct the interest portion on your 2023 tax return (assuming you itemize).

Pushing income into the new year also will reduce your taxable income. If you’re expecting a bonus at work, for example, and you don’t want the income this year, ask if your employer can hold off on paying it until January. If you’re self-employed, you can delay sending invoices until late in December to postpone the revenue to 2024.

You shouldn’t follow this approach if you expect to be in a higher tax bracket next year. Also, if you’re eligible for the qualified business income deduction for pass-through entities, you might reduce the amount of that deduction if you reduce your income.

2. Take full advantage of retirement contributions. Federal tax law encourages individual taxpayers to make the allowable contributions for the year to their retirement accounts, including traditional IRAs and SEP plans, 401(k)s and deferred annuities.

For 2023, you generally can contribute as much as $22,500 to 401(k)s and $6,500 to traditional IRAs. Self-employed individuals can contribute up to 25% of net income (but no more than $66,000) to a SEP IRA.

3. Harvest your investment losses. Losing money on your investments has a bit of an upside — it gives you the opportunity to offset taxable gains. If you sell underperforming investments before the end of the year, you can offset gains realized this year on a dollar-for-dollar basis.

If you have more losses than gains, you generally can apply up to $3,000 of the excess to reduce your ordinary income. Any remaining losses are carried forward to future tax years.

4. Donate to charity using investments. If you itemize deductions and want to donate to IRS-approved public charities, you can simply write a check or use a credit card. Or you can use your taxable investment portfolio of stock and/or mutual funds. Consider making charitable contributions according to these tax-smart principles:

• Underperforming stocks. Sell taxable investments that are worth less than they cost and book the resulting tax-saving capital loss. Then, give the sales proceeds to a charity and claim the resulting tax-saving charitable write-off. This strategy delivers a double tax benefit: You receive tax-saving capital losses plus a tax-saving itemized deduction for your charitable donations.
• Appreciated stocks. For taxable investments that are currently worth more than they cost, you can donate the stock directly to a charity. Contributions of publicly traded shares that you’ve owned for over a year result in a charitable deduction equal to the current market value of the shares at the time of the gift. Plus, when you donate appreciated investments, you escape any capital gains taxes on those shares. This strategy also provides a double tax benefit: You avoid capital gains tax and you get a tax-saving itemized deduction for charitable contributions.

Time is running out

The ideas described above are only a few of the strategies that still may be available. Contact us if you have questions about these or other methods for minimizing your tax liability for 2023.

© 2023