What is the statute of limitations on ERC refund?
Contents
Statute of Limitations on Employee Retention Credit Fraud
Overview of Employee Retention Credits
The Employee Retention Credit (ERC) was created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020 to help employers retain employees during the COVID-19 pandemic. The ERC provides a refundable tax credit against certain employment taxes equal to 50% of up to $10,000 in qualified wages paid to employees after March 12, 2020 and before January 1, 2021. The tax credit was initially available to employers whose operations were fully or partially suspended due to COVID-19 shutdown orders or whose gross receipts declined by more than 50% when compared to the same quarter in 2019.
The ERC was modified and extended by the Consolidated Appropriations Act in December 2020 and the American Rescue Plan Act in March 2021. Key changes included:
Increasing the credit rate to 70% of qualified wages
Expanding eligibility by lowering the required year-over-year gross receipts decline from 50% to 20%
Increasing the limit on per employee creditable wages from $10,000 for the year to $10,000 per quarter
Extending the ERC through December 31, 2021
Employers can receive advance payments of the ERC by reducing their federal employment tax deposits. If the credit exceeds the employer’s payroll tax liability, the IRS will refund the excess as an overpayment. Employers can also request advance payments from the IRS instead of reducing deposits.
Statute of Limitations for ERC Audits and Assessments
The IRS has specific time limits to audit tax returns, make assessments, and collect underpayments related to ERC claims:
Standard 3-Year Limitation
Under IRC § 6501, the IRS generally has 3 years from the date a return is filed to assess additional tax, penalties, and interest. This means the IRS has at least 3 years to audit ERC claims and make adjustments. The timeline to collect underpayments also expires after 10 years.
6-Year Limitation for Substantial Understatements
If a taxpayer understates income by more than 25% of the amount reported, IRC § 6501(e) extends the audit and assessment timeline to 6 years. This rule would apply to taxpayers who significantly overstate ERC credits claimed. The collection statute is also extended to 10 years.
No Limitation Period for Fraud
There is no statute of limitations on IRS audits or assessments in cases where a taxpayer files a false or fraudulent return with intent to evade tax, per IRC § 6501(c). This includes fraudulent ERC refund claims, which can be audited and prosecuted at any time.
Statute of Limitations on Criminal Prosecution
For criminal tax violations related to fraudulent ERC claims, the statute of limitations depends on the specific charges:
| Criminal Charge | Statute of Limitations |
|---|---|
| Tax Evasion (26 U.S.C. § 7201) | 6 years from offense date |
| False Statements (26 U.S.C. § 7206) | 6 years from offense date |
| Fraud (18 U.S.C. § 1001) | 5 years from offense date |
| Theft of Gov’t Funds (18 U.S.C. § 641) | 5 years from offense date |
| Conspiracy (18 U.S.C. § 371) | 5 years from last overt act |
Prosecution can only be initiated within the specified time period after the criminal offense was committed. The timeline may be extended if new evidence emerges later.
Tolling of Limitation Periods
In some cases, the statutes of limitations for audits, assessments, collections, and criminal prosecution may be put “on hold” through tolling:
Tax Court Petitions
If a taxpayer files a petition with the Tax Court disputing a deficiency assessment, the limitation periods for collection and criminal prosecution are suspended under IRC § 6503 until the Tax Court decision becomes final.
Extensions and Agreements
A taxpayer can agree to extend the audit and assessment timelines, using Form 872. The collection statute can also be extended with an installment agreement.
Bankruptcy and Litigation
The limitations periods are suspended for the time a taxpayer is involved in bankruptcy proceedings or litigation that affects the IRS’s ability to commence or continue an audit or collection actions.
Foreign Residency
If a taxpayer is outside the U.S. for 6+ months, the audit and collection periods can be suspended per IRC § 6503(c).
Fraud and Concealment
The statutes are extended, per IRC § 6501(c), when a taxpayer commits fraud or makes misrepresentations to conceal tax issues from the IRS.
Avoiding the Unlimited Statute for Fraud
For taxpayers who claimed ERCs in error but not with intentional fraud, it is important to stay within the normal 3-year audit statute. Amending returns to correct mistakes can help avoid potential criminal charges or an unlimited statute of limitations.
Maintaining thorough documentation of eligibility and good faith effort to comply with ERC rules can demonstrate there was no intent to evade tax. Seeking qualified professional help when unsure about claiming credits is also advisable.
For those who knowingly claimed improper ERC refunds, the unlimited statute will apply. Such taxpayers should consult with experienced criminal tax defense counsel to explore options for correcting past misrepresentations through voluntary disclosure programs. This can mitigate penalties and criminal prosecution risk.
Conclusion
Except for cases of willful fraud, the IRS has limited time to audit questionable ERC claims and seek tax assessments and penalties. But intentionally filing false returns to claim improper credits could lead to serious criminal charges with no statute of limitations. Taxpayers should ensure they document good faith efforts to comply with ERC eligibility rules before claiming these valuable credits. By understanding the applicable limitation periods, employers can claim credits without fear while the IRS focuses enforcement efforts on those who deliberately try to abuse COVID relief programs.