What is the statute of limitations for ERC credit IRS?

What is the statute of limitations for ERC credit IRS?

The statute of limitations refers to the time period the IRS has to audit tax returns and assess additional tax. When it comes to the Employee Retention Credit (ERC), the statute of limitations gets a bit complicated. There are some special rules that apply specifically to ERC credits claimed for certain quarters in 2020 and 2021.

In general, the IRS has three years from the date you filed your return to audit it and assess additional tax [1]. For example, if you filed your 2019 taxes on April 15, 2020, the IRS would have until April 15, 2023 to audit your 2019 return. This is known as the normal three-year statute of limitations under Internal Revenue Code Section 6501 [2].

However, there are some exceptions when it comes to ERC credits:

Special 5-Year Statute of Limitations

For ERC credits claimed for the third and fourth quarters of 2021, the IRS has five years rather than three years to audit returns and assess additional tax [3].

This extended statute of limitations was enacted under Section 3134(l) of the American Rescue Plan Act of 2021 [5]. So for ERC credits claimed in those two quarters, the IRS has until December 31, 2026 to audit returns and assess any additional tax.

This gives the IRS additional time to review ERC claims for those quarters since the rules around the credit were changing rapidly. Many businesses filed amended returns to claim the credit long after the original filing date, so the extended statute gives the IRS more time to audit [1].

Unlimited Statute of Limitations

In cases where a taxpayer fails to report income or files a fraudulent return, the IRS has an unlimited number of years to audit the return and assess tax [1].

This situation could arise if an employer intentionally claimed ERC credits they were not entitled to or did not report income related to those credits. Then the three-year or five-year statute of limitations would not apply.

Refund Suits

If an employer incorrectly claimed ERC credits and received a refund, the IRS can file a refund suit to recover those funds even after the statute of limitations has expired [1]. This extends the time the IRS has to recover improper ERC refunds.

Refund suits are authorized under Internal Revenue Code Section 7405. The IRS generally has two years after the refund was issued to file a suit under 28 U.S.C. § 2415 [3].

Key Points

• Normal statute is 3 years from filing date
• 5 years for Q3 and Q4 2021 ERC credits
• No limit if fraud or unreported income
• IRS can file refund suit to recover improper refunds

The statute of limitations is important because it provides some closure for taxpayers once the period has expired. For ERC credits, taxpayers who claimed properly substantiated credits generally do not need to worry about an audit after the 3-year or 5-year statute runs out.

However, the IRS seems to be heavily scrutinizing ERC claims and will make use of the extended statutes and refund suits to recover any improper credits [3]. Employers should ensure they have the proper documentation to support any ERC credits claimed.

ERC Audit Risks

Even with the statutes of limitations, ERC claims remain at high risk for IRS audit. Here are some key audit triggers the IRS looks for [4]:

• Claiming credits exceeding gross wages for a quarter
• Claiming credits for employees who did not perform services
• Lack of documentation to support eligibility and amount of credits claimed
• Claiming credits not related to COVID-19 circumstances
• Claiming credits after PPP loan forgiveness

Employers who claimed properly substantiated ERC credits that were allowed under the rules at the time should have less risk of audit. However, the IRS scrutiny means all claims could be reviewed, even if they were filed correctly.

If selected for audit, the employer will need to provide documentation showing they were eligible for the credits claimed. This includes payroll records, documentation of government shutdown orders or revenue declines, and any other evidence to support the ERC claim.

Having organized records and being prepared to explain the basis for the credits can help get through an ERC audit smoothly. Employers may want to consult a tax professional for assistance if audited.

Penalties for Incorrect ERC Claims

If the IRS determines an employer claimed excessive or fraudulent ERC credits, penalties may be imposed :

• 20% penalty for excessive claims
• 75% civil fraud penalty if intentional disregard of rules
• Ban from claiming credits for 2 years if reckless or intentional disregard
• Potential criminal prosecution for egregious situations

In addition to penalties, the employer will have to repay any improperly claimed credits plus interest. The penalties and interest can add up quickly, so it is important for employers to exercise caution when claiming ERC.

Conclusion

The statute of limitations provides some protection from IRS audit for employers who claimed ERC credits properly. However, the IRS is heavily scrutinizing ERC claims and can assess penalties for excessive or fraudulent credits.

Employers should maintain documentation to support any ERC credits claimed in case of an audit. And they should claim credits conservatively to avoid penalties down the road. Consulting a tax advisor can help ensure ERC compliance and smooth handling of any IRS inquiries.