The IRS recently reminded employers of penalty relief related to claims for the Employee Retention Tax Credit (ERTC). The situation may arise when additional income tax is owed because the deduction for qualified wages is reduced by the amount of a retroactively claimed ERTC, but the taxpayer is unable to pay the additional income tax because the ERTC refund payment has not yet been received.
This situation may arise, in part, due to the IRS’s backlog inprocessing adjusted employment tax returns (e.g., Form 941-X) on which the taxpayers claim ERTC retroactively. Based on applicable law, IRS guidance provides that an employer must reduce its income tax deduction for the ERTC qualified wages by the amount of the ERTC for the tax year in which such wages were paid or incurred. Taxpayers that claimed the ERTC retroactively and filed an amended income tax return reducing their deduction for the ERTC qualified wages paid or incurred in the tax year for which the ERTC is retroactively claimed have an increased income tax liability, but may not yet have received their ERTC refund.
Taxpayers who qualify may be eligible for relief from penalties for failing to pay their taxes if they can show reasonable cause and not willful neglect for the failure to pay. In general, taxpayers may also qualify for administrative relief from penalties for failing to pay on time under the IRS’s First Time Penalty Abatement program if the taxpayer:
- 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 have questions related to ERTC and penalties that may be due, contact your ShindelRock tax professional .