To make matters worse for TPPs, HR 7024, which the House has passed and the Senate is considering, would extend the statute of limitations for the IRS to assess underpayments of ERC claims by two years, giving the IRS plenty of time to audit ERC refunds. The legal memorandum concludes that all three types of TPPs are liable for any underpayments of payroll taxes as a result of improper claims, together with clients on whose behalf the TPPs file the claims for the ERC by filing the Form 941 or 941-X amended return.Īlthough the agreements that most TPPs have with their clients provide for a tax indemnity where the client agrees to reimburse the TPP for payroll tax deficiencies, due to the large number of improper ERC claims, whether a TPP could be reimbursed for all of its potential liabilities for back taxes clawed back due to improper claims is questionable. 5, 2024, discusses the legal obligations of three different types of TPPs: (1) Section 3504 Agents (firms appointed by a company that files a Form 2678 as its agent who has control, receipt, custody or disposal of, or pays the wages of the company’s employees) (2) Non-certified professional employer organizations and (3) Certified professional employer organizations.
However, if the company used a TPP who filed the payroll returns, then the TPP was required to claim the ERC on behalf of its clients. Many businesses claimed the credit, frequently upon the advice of ERC consulting firms, even though they did not pass either the decline in gross receipts test or the governmental order test.īecause the ERC is a credit against payroll taxes, a claim for the ERC was made on the quarterly payroll tax return (Form 941, if the ERC claim was filed as wages were paid, or a Form 941-X amended return, if the ERC claim was filed for prior quarters after the company became aware of the credit). However, many businesses filed ERC claims even though they might not have been eligible to do so, because to be eligible, the business had to either have (1) suffered a significant decline in gross receipts (for 2020 quarters, more than a 50% decline in gross receipts compared to the same quarter in 2019, and for 2021 quarters, more than a 20% decline in gross receipts compared to the same quarter in 2019) or (2) had their business operations either fully or partially suspended as a result of a COVID-19-related governmental order. Accordingly, the theoretical maximum credit – assuming the employer was eligible to claim the ERC for all six available quarters (Q2 through Q4 2020 and Q1 through Q3 2021) – was $26,000 per employee. The ERC was extended and expanded for 2021 by the Consolidated Appropriations Act to allow a 70% credit for wages paid, with a maximum credit per employee of $7,000 per employee per quarter. The original credit under the CARES Act – if the employer qualified – was 50% of wages paid to employees, with a maximum of $5,000 per employee for 2020.
The ERC was enacted under the CARES Act to provide a refundable tax credit to encourage employers to retain employees during the pandemic. 16, the IRS Office of Chief Counsel released a legal memorandum concluding that third-party payers, such as professional employer organizations (PEOs), certified professional organizations, and Section 3504 Agents (collectively, “TPPs”) are liable for underpayments of payroll taxes resulting from improper claims for the employee retention credit (ERC) that the TPPs filed on behalf of clients.