Special IRS Audit Rules For The Employee Retention Credit (ERC)

A recent tax benefit to certain employers as a result of COVID is called the Employee Retention Credit. It benefits some employers who had employees affected during COVID. For the full details, IRS has an explanation here

This one gets tricky, but hang in there. 

The IRS has a special five-year limitation period for some employers who claimed the Employee Retention Credit (ERC). “Some,” that’s helpful, right?

If you claimed the ERC in either Quarter 3 or Quarter 4 (or both) of 2021, the statute of limitation is five years not the usual three years. 

The Infrastructure Investment and Jobs Act of 2021 retroactively limited the ERC for Quarter 4 of 2021 back to the normal 3-year statute of limitations.

To determine the audit limitations period, payroll tax returns for a period ending with or within a calendar year that is filed before April 15th of the following year are treated as filed on April 15th of that following calendar year.

In this case, filling an amended payroll tax return to claim the ERC does not extend the statute of limitation.

Head spinning yet?

Let’s look at an example.

Bob’s Tractor Supply filed its quarterly employment tax return (Form 941) for the third quarter of 2021 on October 31, 2021, and then went and had a happy Halloween. Later, on March 1, 2022, they amended the Form 941 to claim the ERC.

For the audit limitations, the IRS deemed Bob’s Tractor Supply’s tax return filed on April 15, 2022, since they filed before April 15th of the following year. (In this case, there is not much incentive to get taxes done early.)

Since the special five-year statute of limitations applies, the IRS has until April 15th, 2027, to audit the return and assess any additional tax because Bob’s Tractor Supply claimed the ERC in Quarter 3 of 2021.

But wait! There are now new rules … just in case you weren’t confused already.

On January 31, 2024, the House passed H.R. 7024, which extends the statute of limitation on assessment for the ERC to six years after the latest of:

  • The date on which the original return for the relevant quarter is filed
  • The date on which the return is treated as filed in present-law statute of limitations rules
  • The date on which the credit or refund with respect to the ERC is made

As of this writing, it is still being read in the Senate. You can track the progress of H.R. 7024 here

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R. J. Kelly, Wealth Legacy Group®, Inc. – April 2024