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Tax Bill Ending Employee Retention Credit Could Affect Some Financial Advisers

S.J. Steinhardt
Published Date:
Feb 12, 2024


A bipartisan tax bill passed by the U.S. House of Representatives last month would be paid for by ending the Employee Retention Credit (ERC) and increasing penalties against promoters involved with submitting faulty ERC claims, and those two changes could affect some financial advisers, Accounting Today reported.

The bill would, among other things, enhance the child tax credit for millions of lower-income families and extend tax breaks for businesses. It would cut off any new ERC claims after Jan. 31, and substantially increase penalties for promoters involved with submitting faulty claims under the ERC, which has been plagued by fraud.

"At the end of the day, we are replacing bad tax policy with good tax policy by cutting off funding for the employee retention tax credit—a COVID-era program that costs six times its original amount and is so riddled with fraud, that the IRS put it on its "dirty dozen" list of the worst scams in America," said Rep. Jason Smith (R-Mo.), chair of the House Committee on Ways and Means, Accounting Today reported at the time. "This will save American taxpayers over $75 billion."

If passed into law, this provision could impose a "heavy burden" on advisers who may have recommended the credit, said Niles Elber of law firm Caplin & Drysdale’s Washington office, in an interview with Accounting Today. The bill may define them as "promoters" subject to penalties up to the greater of $200,000 or 75 percent of the income they received from the taxpayer for a faulty claim, plus a fine of $1,000 for each failure to comply with due diligence requirements, a House summary of the legislation showed.

"It's a significant bump up, and so you're getting a combination of, 'OK, we're not going to be paying any more claims,' and 'We're bumping up these two penalties,'" Elber said. He also said that he doubted how much enforcement cases could contribute to a predicted $40 billion in revenue this year and next, as the Congressional Budget Office estimated.

The retention credit "has been plagued with fraud from unscrupulous promoters encouraging businesses to improperly claim the credit," wrote Garrett Watson and Erica York of the Tax Foundation in a blog post this month.

The bill must still pass the U.S. Senate, where its fate is uncertain. "It appears that the proposed tax package has widespread support, although no one in Washington appears to be satisfied with all of the provisions," wrote Kristine Tidgren, the director of the Center for Agricultural Law & Taxation at Iowa State University, in a blog post summarizing the bill's provisions. "It is not certain at this time whether the bill will pass or if it will pass without significant amendment. If the bill does pass, the timeframe for its passage is unclear."  

IRS officials instructed taxpayers to file their returns this year without waiting for Congress to act, Accounting Today reported earlier, and business owners and their advisers should try to be patient and likely plan to never receive payment of the employer credit if they haven't already received it from the IRS, according to Elber.

"The problem is that there are employers who are legally entitled to payments," Elber said. "They're the ones who are left at this point, at least from an enforcement standpoint, holding the bag, because the service is going to look at each and every one of them, and they're going to do it with an intense lens." 

"We urge and encourage taxpayers to file when they're ready," IRS Commissioner Danny Werfel said on Jan. 26, in announcing the beginning of tax season. "Don't wait on Congress. If there's a change that impacts your return, we will make the change and we will send you the update, whether it's an additional refund or otherwise, without you having to take any steps."

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