On March 9, 2023, the U.S. Department of Treasury released its annual 224-page “Greenbook,” which outlines and explains the tax proposals relayed in the Biden Administration’s fiscal year 2024 budget.1 Of course, just like all Greenbooks before this one, it’s a real page turner (or “screen scroller”), but we’d like to especially direct your attention to page 179 and the heading there: “Increase the Statute of Limitations on Assessment of the COVID-Related Paid Leave and Employee Retention Tax Credits.”
So, while many employers are still trying to understand the original workings of the assessment statute of limitations (SOL) in the employee retention credit (ERC) context, the fiscal year 2024 budget includes a proposal that would change things up a bit. In fact, it proposes to permit the Internal Revenue Service (IRS) a longer period of time to assess erroneous ERC claims for those quarters not already extended previously by the American Rescue Plan Act of 2021 (ARPA).2
In light of this, let’s take a look at this year’s Greenbook, familiarize ourselves with what the current law is, and understand what would happen if the proposed extension becomes effective.
Before the IRS can collect a tax, it must assess the tax within the prescribed period of time known as the assessment SOL.3 Remember, “assessment does not create the liability but merely acts as a judgment for taxes found due.”4 So, the assessment SOL limits the IRS’s ability to recoup additional taxes against a taxpayer with respect to a specific tax year. In other words, after the assessment SOL, the tax liability may no longer be audited and adjusted.5 Note, once assessed, the collection SOL begins, allowing 10 years for the IRS to collect the assessed amount.6
Generally, per Internal Revenue Code (IRC) §6501, the assessment SOL is the three-year period after the later of: (1) the return’s filing date, or (2) the return’s unextended due date. The SOL period is measured by excluding the day of filing the return and the day of paying the tax. Additionally, unless otherwise stated, a “year” for SOL purposes refers to a calendar year.
Example—Assessment SOL, General Rule:
Taxpayer files an income tax return on April 15, Year 2. The three-year assessment period begins to run on April 16, Year 2, and ends on April 15, Year 5.
Significantly, as the Greenbook notes, “the general period of limitations on assessment does not restart upon the filing of an amended return.”7 Moreover, no exception to this rule applies in the case of employment tax returns—i.e., the assessment SOL does not restart when a Form 941-X return is filed to amend a previously filed Form 941. Finally, filing an amended return will not reduce the assessment SOL in the case of a fraudulent original return.8 Simply, in the case of fraud, there is no assessment statute of limitations.
NOTE: Another collection device exists apart from the typical assessment/collection process. Under IRC §7405, the government is permitted to initiate a suit to recover erroneously issued refunds. Such suit must be brought within the “erroneous refund statute expiration date,” or ERSED, which is two years from the date the refund is made, or five years if the refund was the result of fraud or misrepresentation of a material fact.9
Employers generally use Forms 941-X (amended employment tax returns) to claim ERC relief for past quarters.10 Before addressing the assessment SOL applicable to the IRS in the ERC context, it’s important to first understand the period of time within which eligible taxpayers may timely file to claim ERC. As the Greenbook clarifies:
In general, taxpayers must file a claim for credit or refund within the later of three years from the time the tax return was filed or 2 years from the time the tax was paid. For this purpose, if an employment tax return for a period ending with or within a calendar year is filed before April 15 of the succeeding calendar year, the return is considered filed on April 15 of that succeeding calendar year. For example, all timely filed Forms 941 for any quarter of 2020 are considered filed on April 15, 2021. Thus, an employer that timely filed and paid employment tax may file a claim for [ERC] with respect to any quarter of 2020 by filing an amended employment tax return, generally Form 941-X, until April 15, 2024. For all timely-filed Forms 941 for any quarter of 2021, the same deadlines apply as in the previous sentence, but one year later. [Emphasis added].
Examples—Timely ERC Filing:
Taxpayer timely filed Form 941 for the 2nd quarter of tax year 2020 on July 31, 2020. This return is deemed filed on April 15, 2021. To claim ERC for that quarter, Taxpayer must file the Form 941-X for that quarter on or before April 15, 2024.
Taxpayer timely filed Form 941 for the 2nd quarter of tax year 2021 on July 31, 2021. This return is deemed filed on April 15, 2022. To claim ERC for that quarter, Taxpayer must file the Form 941-X for that quarter on or before April 15, 2025.
Now, let’s pivot to consider the currently prescribed assessment SOL applicable to the IRS in the ERC context. Presently, for all but the 3rd and 4th quarters of 2021, the general IRC §6501 rule applies. This means that the IRS “must assess taxes within three years after a return’s original filing date (whether or not the return was filed on or after the due date).”11 Interestingly, as the Greenbook notes:
As a result of these timing rules, it is often the case that the statute of limitations on assessment expires at the same time as the deadline for a taxpayer to submit a claim for credit or refund on an amended return. For example, all timely-filed employment tax returns for all four quarters of 2020 are treated as filed on April 15, 2021 for the purpose of the statute of limitations on assessment. Furthermore, current law generally allows an employer that timely filed a Form 941 for any quarter of 2020 to submit a claim for credit or refund for that quarter of 2020 as late as April 15, 2024 (three years after April 15, 2021); the statute of limitations on assessment for this taxpayer would also expire on April 15, 2024 (three years after April 15, 2021).
Example—Assessment SOL (Excluding 2021’s 3rd and 4th Quarters):
Taxpayer timely filed Form 941 for the 2nd quarter of tax year 2020 on July 31, 2020. This return is deemed filed on April 15, 2021. To claim ERC for that quarter, Taxpayer filed the Form 941-X for that quarter on or before April 15, 2024. The IRS assessment SOL expires on April 15, 2024.
However, for the 3rd and 4th quarters of 2021, ARPA extended the assessment SOL from three years to five years.12 The Greenbook states:
Thus, the limitation period for assessment of erroneous [ARPA] paid leave credits and [ERC] will not expire before the date that is five years after the later of (1) the date on which the original return that includes the calendar quarter with respect to which the paid leave credit or [ERC] is determined is filed, or (2) the April 15 date on which the return is treated as filed. However, the [ARPA] extension of the limitations period applies only for the second and third quarters of 2021 for the paid leave tax credit and the third and fourth quarters of 2021 for the [ERC]. The [. . .] CARES Act did not include extensions of the limitations period. Hence, the [ARPA’s] extended limitations period applies only for two of the six quarters in which an employer may claim the paid leave tax credit and only for two of the eight quarters in which an employer may claim the [ERC].13
Example—Assessment SOL 2021’s 3rd Quarter:
Taxpayer timely filed Form 941 for the 3rd quarter of tax year 2021 on June 30, 2021. This return is deemed filed on April 15, 2022. To claim ERC for that quarter, Taxpayer filed the Form 941-X for that quarter on or before April 15, 2025. The IRS assessment SOL expires on April 15, 2027.
The fiscal year 2024 budget proposes to “extend the limitations on the time period for the assessment of erroneous [ERC] under the CARES Act, as amended prior to the [ARPA], to conform with the same five-year period provided under [ARPA].”14 This means that the five-year IRS assessment SOL would apply to all eight calendar quarters in 2020 and 2021.
The Greenbook explains the reasoning for conforming all quarters in this manner, stating:
Providing a consistent rule for the limitations period to assess erroneous [ERC], as amended prior to [ARPA], would assist with IRS compliance and enforcement efforts. Additionally, the majority of dollars of [ERC] claims were made on amended tax returns, often with a substantial delay relative to the quarter of the underlying activity that generated the credit. As the current-law three-year limitations period applicable to the [ERC] does not restart when an amended return is filed, a three-year assessment limitations period makes it difficult for the IRS to audit the amended returns and timely assess any tax, if warranted.15
Undoubtedly, the IRS has been steadily increasing its scrutiny on ERC filings. Even if the fiscal year 2024 budget proposal is scrapped and the current assessment SOLs remain in place, that still gives the IRS a lengthy compliance enforcement period. And, remember, outside of the assessment SOL, the IRS may take other actions such as initiating a suit to recover erroneously issued refunds, or, where fraud is involved, the return will be indefinitely open to assessment. Note that a later filed amended return does not cure fraud.
All of this should prompt employers that took uncertain positions or that are bothered by nagging doubt about the accuracy of their claims and sufficiency of supporting documentation to consult a tax professional for an immediate pre-audit ERC assessment. If you need help with your ERC claim, contact our team today at (410) 497-5947 or you can schedule a confidential consultation.