ERC Delays and Expiring Deadlines: The Case of Filing Protective Claims Now

 

Leo Unzeitig, JD, CPA-San Antonio

Chamberlain Hrdlicka

 

Ah, the Employee Retention Credit (ERC) – that noble, if slightly bloated, stimulus lifeboat tossed to businesses during the pandemic. Like many government lifeboats, it came with its own set of barnacles: forms, deadlines, conflicting guidance, fraud and endless opportunities to unknowingly mess up. 

 

The most common issue puzzling practitioners is when (and even whether) taxpayers must amend an income tax return to reverse a wage expense that was reported on an ERC claim. This existential dilemma—let’s call it “To Amend or Not to Amend: A Taxing Tragedy in Two Acts”—is a drama for another time.

 

For purposes of this discussion, let’s assume your client did amend their 2021 income tax return, dutifully subtracting out the wage expense at issue. 

 

Be on notice, your client may be running up against a looming statute of limitations issue. 

 

That’s because there is a good chance one or more of the taxpayer’s 2021 ERC claims is still pending. Indeed, the National Taxpayer Advocate recently noted that more than one million ERC claims are lingering somewhere in the agency. 

 

And herein lies the rub:  While the ERC claim may float in this bureaucratic purgatory indefinitely—suspended, untouched and, frankly, unloved—the same is not true of your client’s income tax return. The statute of limitations for amending or otherwise adjusting the income tax return in question will, in most cases, expire three years from the date the return was filed or two years from the date the tax was paid—whichever comes later. For the typical 2021 filer, this means the clock is running out right now, this year.  

 

This is where the whipsaw effect rears its paradoxical head: By the time the IRS gets around to officially denying your client’s ERC claim, the taxpayer may find themselves barred from re-claiming the wage expense deduction they originally backed out, leaving them stranded in a liminal space where both the deduction and the credit are permanently out of reach.

 

But don’t fret. There is a solution: file a protective claim for refund. This little piece of bureaucratic armor lets taxpayers say, “Hey, IRS, this is dragging on, but I see what you’re doing and I’m not falling for it.” A protective claim can freeze the statute of limitations and preserves the taxpayer’s right to go back and fix their income tax return once the IRS finally gets around to resolving their ERC claim.

 

It’s not glamorous; it won’t make you the hero of a Netflix miniseries, but it might just save your client some money. And in the world of tax law, saving money is second only to a refund.