Penalty Relief IRS Guidance for Employers Claiming Employee Retention Credit.

• Author: Josephs, Stuart R.
• Position: FedTax

IR-2022-89, released April 18, states that the Treasury Department and the IRS received requests from taxpayers and their advisers for relief from penalties arising when additional income tax is owed because an eligible employer's deduction for qualified wages is reduced by a retroactively claimed employee retention credit (ERC), but the taxpayer can't pay the additional tax because the ERC refund has not yet been received.

Based on applicable law, IRS guidance requires an employer to reduce its income tax deduction for the ERC qualified wages by the ERC for the tax year in which such wages were paid or incurred.

Taxpayers that claimed the ERC retroactively and filed an amended income tax return, reducing their deduction for the ERC qualified wages paid or incurred in the tax year for which the ERC is retroactively-claimed, have an increased income tax liability but may not yet have received their ERC refund.

IR-2022-89 reminds taxpayers that, consistent with the relief from penalties for failure to timely pay noted in IRS Notice 2021-49, they 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 also may qualify for administrative relief from penalties for failing to pay on time under the IRS' First Time Penalty Abatement program if they:

1. Did not previously have to file a return or had no penalties for the three prior tax years;

2. Filed all currently required returns or filed an extension of time to lile; and

3. Paid, or arranged to pay, any tax due.

   Qualified Wages Deduction Disallowance Generally, pursuant to IRC Sec. 3134(e), an employer's deduction for qualified wages, including qualified health plan expenses, must be reduced by the ERC.

   The Treasury Department and the IRS have been asked about ihe timing of this reduction, specifically when a taxpayer files an adjusted employment tax return to claim the ERC for prior calendar quarters, but has already filed an income tax return for the tax year for which the ERC is claimed on the adjusted employment tax return.

   Under IRS Notice 2021-20 (Section III.L), a reduction of the deduction for qualified wages, including qualified health plan expenses, that is caused by receiving the ERC occurs for the tax year in which the qualified wages were paid or incurred.

   When a taxpayer claims the ERC because of retroactive legislation or otherwise files an adjusted employment tax...