Do you need to amend your tax return to apply for the Employee Retention Credit (ERC)? The answer is yes. If the pre-audit evaluation changes the amount of ERC available, the employer may want to consider filing an amended return. It is important to have a tax professional who understands the ERC program and can carry out an exhaustive study that incorporates pre-audit evaluation into the calculation of the claim. The Department of the Treasury and the Internal Revenue Service (IRS) have received requests from taxpayers and their advisors to exempt themselves from the penalties that result from owing additional income taxes due to a retroactively requested ERC.
Taxpayers who applied for the ERTC retroactively and filed a modified income tax return to reduce their deduction for qualifying ERTC wages paid or incurred in the tax year for which the ERTC is requested have a higher income tax liability, but may not yet have received their refund from the ERTC. If a tax-exempt organization applied to the ERC for salaries paid for an unrelated business activity (UBI), it will be subject to the amended reporting requirement if it submitted its Form 990-T not including the ERC wage reduction. The wage expenses and health insurance costs listed on the income tax return must be reduced by the amount of the ERC. Section 45B establishes a business tax credit for the amount of the FICA tax liabilities of the restaurant employer attributable to employee tips that exceed those considered wages for the purpose of meeting federal minimum wage requirements. If an employer is audited and the amount of the ERC is reduced, the penalties could range from a 20% precision-related penalty to a 75% fine if the IRS states that the employer has committed civil fraud.
According to the IRS, documentation related to the ERC application, including all payroll tax records, from an eligible employer must be kept “for at least four years after the date the tax is due or paid, whichever comes later.” The IRS has not provided any guidance on how a tax-exempt organization should declare the ERC in its annual filing of Form 990 or Form 990-PF. All salaries and health care expenses used for the ERC must be traced back to the year in which the deduction was claimed on an income tax return. The employer or its advisor who may have taken an uncertain position or who has doubts about whether they have the appropriate documentation should consult a tax professional for a pre-audit evaluation of the ERC application. Therefore, it is essential to modify your tax return in order to apply for an ERC. If you have any questions about this process, contact your BMSS tax professional by calling (83 CPA-BMSS). Representing the restaurant industry, your office provides extensive experience reporting on tips, service charges, tip agreements and Section 45B tax credits.
Chittenden advises clients on issues related to mobile workforce, including state income tax withholding for mobile employees and taxation and reporting on expatriates and expatriates.