The Internal Revenue Service (IRS) has released IR-2022-89 to remind taxpayers of penalty relief available from additional taxes resulting from Employee Retention Credit (ERC) Claims. The IRS has received requests from taxpayers and professional advisors for relief from penalties due to additional tax resulting from wages reduced on taxpayers’ income tax returns by the amount of a retroactive ERC. In many cases the taxpayer is unable to pay the additional income tax because the refund related to the ERC has not yet been received when the tax is due.
How This Can Occur
This situation can arise when a taxpayer files an amended 941-X to claim the ERC. The rules related to the ERC state that the wages related to the ERC must be reduced by the amount of the credit for the period in which the ERC is claimed. Here is an example of the situation: A calendar year (12/31 year-end) taxpayer files an amended 941-X to claim the ERC for the period ending September 31, 2021. The amount of the ERC is $500,000. The ERC rules would require the taxpayer to reduce its wages related to the ERC by $500,000 on their 2021 income tax return. But the issue may be that at the time the income tax is due, the taxpayer has not received the ERC amount of $500,000, and subsequently, does not have the money available to pay the taxes associated with the $500,000 reduction of wages from the ERC on their income tax return.
Penalty Relief
The IRS is aware that these circumstances may take place in part due to the IRS’ backlog in processing the form 941-x’s. The IRS notification consistent with relief from penalties for failure to timely pay in Notice 2021-49, states that taxpayers may be eligible for penalty relief if they can show reasonable cause and did not act neglectfully in failure to pay. Taxpayers may also qualify for penalty relief for failing to pay under the IRS First Time Penalty Abatement Program, if they:
- Did not previously have to file a return or had no penalties for the three prior tax years,
- Filed all currently required returns or filed an extension of time to file and
- Paid, or arranged to pay, any tax due.
If you are concerned about a penalty for failure to pay in a timely, fashion, please email us and we can discuss possible options.
