Kelly Bullis: Update on Employee Retention Credit

I suppose the story about this “little credit that could” is a reinforcement of greed and outright dishonesty on the part of unscrupulous folks out there pushing everybody to sign up and get this “freebee” before it’s too late.

I’ve learned over the years that when somebody is pulling out the old FUD (Fear, Uncertainty, Doubt) tactics, what they are selling is probably a fraud. In earlier articles, I’ve talked about how fraudsters use emotion to push folks into making irrational decisions. Well, the IRS has identified over $1 billion in fraudulent ERC applications mostly filed by these unscrupulous fraudsters so far, and they are not done looking at everything yet.

The IRS created an “ERC Voluntary Disclosure Program” which has yielded over $225 million in stopped fraudulent applications.

There is also a “Claim Withdrawal Process” where 22,000 claims have been voluntarily withdrawn, resulting in $572 million in fraudulent assessments being pulled back.

The ERC is now going to be subject to a lot of special audit attention by the IRS, also the IRS is doing heavy investigations into finding fraudulent promoters, with criminal charges being filed.

In the meantime, anybody waiting for their ERC refund checks needs to tighten their belts. Don’t expect to see those refund checks for a while longer. The IRS is loath to issue any fraudulent payments, so their caution is causing no checks to be issued at this time.

The second part of the ERC is amending the year of the credit and in essence adding that total amount to your amended taxable income. (Technically, you are reducing the payroll expense by the amount of the credit.) This is the ugly little secret about ERC. You do NOT get to keep it all!

Here is a real case study. We have a client who is self-employed, has two teenage children, and did not have a lot of other income. In 2023, he got a small ERC of $15,611. We drafted a 2021 amended tax return for him (to add the credit back into income). The result is that it caused his Federal Income Tax to go up by $1,168. Because his business was a self-employed business on schedule C, it also increased his self-employment tax by $2,205. Finally, because of his low-income status, he originally received some Earned Income Credit, but because his “earned income” went up by the ERC amount, he lost $2,855 of Earned Income Credit. Net result, he has to pay the IRS $6,228, which is 40% of the ERC!

The IRS says you have the three-year statute of limitations to file an amended return without incurring penalties. So, in the case of our poor client’s example above, he has until April 15, 2025 to file his amended return. That gives him some time to save up his money so he can pay the IRS.

Have you heard? Prov 2:14-15 (speaking of evil men) “who rejoice to do evil, and delight in the perverseness of evil, who are crooked in their ways and wayward in their paths.”

Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 775-882-4459. On the web at BullisAndCo.com. Also on Facebook.