IRS Pressured By Congress on ERTC Processing And Tax Penalty Relief

Lawmakers are asking the Internal Revenue Service to expedite the processing of Employee Retention Tax Credits and not to penalize small businesses for incorrectly paying their estimated quarterly taxes as they await their claims. During a hearing before the House Ways and Means Oversight Subcommittee, Congress and IRS Commissioner Charles Rettig talked about the tax credits. While the ERTC was cut short in the fourth quarter of 2021, many small businesses and nonprofits are still waiting on relief from the third, second, and first quarters of 2021 while processing was delayed eight to ten months. As it was designated to be emergency relief, receiving the advance payment of this credit could mean life or death for many small businesses and nonprofits. This was due to the IRS not being able to automate the processing. Congress pressed Rettig on publicly committing to expedite the ERTC processing.

Rettig discussed his background in being sympathetic to small businesses and noted that many of them previously didn’t face the challenges that the pandemic presented to them when they needed to turn to the IRS for help. In this discussion, Congress pointed out the delays at the IRS were hurting small businesses. They asked for the number of claims the IRS processed from the previous quarter’s amendments before Q4 2021 and how many have been processed since that time. Rettig noted that Congress itself cut short the ERTC. 

The main issue companies are faced with now is the amended quarterly tax return, Form 941. Companies are filing their 941 on time and then filing the amended 941 because payroll companies don’t have the bandwidth to get the information needed in time for the 941 filing. In these cases, companies will be filing their April 2022 returns with reduced wages, but they still have not received the checks for the ERTC credit. Ultimately what this means is taxpayers are paying tax on income they have never received. Not only are small businesses liable for the tax on reduced wages, but they’re also liable for the safe harbor on their estimated taxes, which is inflated due to the reduced wages. 

Changes with R&D tax credits and expenses

There are now changes with the IRS processing R&D tax credits, asking for more documentation now to back up the claims for refunds. Now, there’s a 30-day grace period for the first year while it’s being implemented. Taxpayers are going to get one shot at making valid refund claims for R&D purposes, and there’s a list of requirements that needs to go along with the application. This is to ensure that the IRS isn’t overburdened with refund requests which they cannot audit, or with applicants that don’t qualify. However, this also increases the burden on the taxpayers since they have to get all that documentation together from the beginning. 

Another recent legislative change involves the amortization of R&D expenses after a provision in the Tax Cuts and Jobs Act of 2017 took effect this year. While this change doesn’t affect those who are filing for R&D, this is one of the biggest changes to the R&D itself. Starting this year U.S. companies lost the ability to immediately write off the full value of their investments in R&D. This has caused companies to plan for alternative decision making. While there was some hope that the omnibus spending bill that Congress passed would restore the tax break or at least further delay the TCJA provision from taking effect, it wasn’t included.

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