IRS Alerts Taxpayers to Urgent Deadline for Rectifying Incorrect Tax Credit Claims, Imposing Penalties for Non-Compliance
The Internal Revenue Service (IRS) has issued an important notice to taxpayers regarding the deadline to rectify incorrectly claimed tax credits. In a bid to avoid penalties and interest, taxpayers are being urged to apply for a voluntary disclosure program before the fast-approaching deadline.
The IRS has specifically warned businesses that were misled by predatory promoters into filing improper employee retention credit (ERC) claims. These businesses have until March 22 to take action and correct their claims. Failure to do so may result in follow-up compliance action.
The ERC is a refundable tax credit designed for businesses that continued paying employees during COVID-19 shutdowns. Unfortunately, a large number of improper ERC claims were pushed by predatory promoters on unsuspecting businesses. An investigation by the IRS Criminal Investigation division revealed over $2.8 billion of potentially fraudulent ERC claims.
To address this issue, the IRS developed two initiatives to help taxpayers who incorrectly claimed the credit. The first initiative is a voluntary disclosure program that allows employers to admit their mistake and repay the incorrectly received credits. In exchange for disclosing the information, businesses are allowed to keep 20% of the credits and won’t be charged interest or penalties on the remaining 80% that they repay.
The second initiative is a withdrawal program introduced in October 2023. This program allows businesses to withdraw questionable claims and avoid costly penalties and interest. Even if a business has received the ERC refund check but hasn’t cashed or deposited it, they can still withdraw their claim. By withdrawing the claim, the IRS considers it as if it was never filed, and no penalties or interest will be imposed.
The IRS emphasizes the importance of taking action before the rapidly approaching deadline of March 22. Correcting an incorrect claim now can save businesses valuable time, energy, and money in the future. The domino effect of an incorrect claim can have severe consequences for a business’s cash position, making it crucial to rectify the situation promptly.
In addition to the withdrawal and voluntary disclosure programs, the IRS also offers relief options for taxpayers who are unable to pay the full amount of the incorrectly obtained ERC. Taxpayers can apply for an installment agreement that allows them to make monthly payments. The IRS will work with taxpayers to find a resolution that suits their current financial condition and ability to pay.
Furthermore, there are other forms of penalty relief that taxpayers can explore. The IRS may waive penalties for taxpayers who didn’t file or pay taxes on time under reasonable cause penalty relief provisions. Extenuating circumstances such as illness or natural disasters may qualify taxpayers for this relief. Additionally, there is a first-time penalty abate and administrative waiver process that allows taxpayers to qualify for penalty relief, even if they have missed filing deadlines or payment due dates.
It is important for taxpayers to note that the first-time penalty abate is discretionary, and the IRS is not obligated to grant the waiver. However, if applicants have a good compliance history and meet program requirements, the IRS may grant the waiver as a one-time favor.
As the deadline approaches, taxpayers are encouraged to take advantage of these relief options and rectify any incorrectly claimed tax credits promptly. The IRS has provided solutions for taxpayers to do the right thing now and avoid future hassles and expenses. March 22 marks a crucial deadline for businesses to correct their claims and avoid penalties and interest that could prove detrimental in the long run.
