Question
I know that the IRS requires that I amend the 2020 tax return for my 2020 Employee Retention Credit (ERC).
Here’s the deal: I don’t have the credit yet. And as you know, the IRS stopped processing ERC claims from September 14, 2023, through at least December 31, 2023. My claim was filed during this period.
I don’t know when to expect it, or if I will receive it. My best guess is that I will get it, but I won’t receive it until, say, November or December.
It’s a tidy sum, $500,000.
Here’s my dilemma:
- The statute of limitations on my 2020 federal tax return expires on May 17, 2024.
- I may not receive the money at all, so I don’t want to amend my 2020 tax return and pay additional taxes to the IRS for a ghost $500,000. (And I’m not flush with money, so I likely need at least some of the $500,000 to pay those extra 2020 taxes.)
- If I receive the money after May 17, 2024, the statute of limitations will preclude the amended return and I’ll have the $500,000 tax-free. Obviously, this is unfair to the government.
What are my options?
Answer
You don’t have options.
You have a road map. First, as laid out in Section 2301(e) of the CARES Act, you apply IRC Section 280C(a), which tells you to reduce the 2020 wages by the ERC calculated for the 2020 year.
In other words, you should have reduced the 2020 wages by $500,000 when you filed Form 941-X claiming the ERC.
You did not. Now, you have to file the amended return before expiration of the statute of limitations on May 17, 2024.
That’s right around the corner—don’t sleep on this.
Key Point. Had our friend filed his 2020 tax return later than May 17, 2021, he would have three years from that date to amend his 2020 return. For example, say he extended the return and filed it on September 1, 2021. He would have until September 1, 2024, to file his amended return.
Cash Problem
You mentioned that you are not flush with cash. You may have to borrow the money from a bank or a buddy, or enter into a payment agreement with the IRS. Obviously, this is distasteful.
Protective Claim
You also need to protect yourself in case the IRS rejects your claim, or a chunk of it.
You do this by filing a protective claim.
With the protective claim, if you don’t receive the $500,000 ERC or receive some lesser amount, you can amend the amended return to increase the wage deduction and obtain a refund. (Yes, you realize the benefits of the protective claim once the $500,000 is resolved, and that’s likely after expiration of the statute of limitations.)
Example
You file Form 1040-X on May 15, 2024, and pay $150,000 in additional taxes because of the reduction in wages. On that same day, you place your protective claim in a different envelope, pay for separate certified mail, and file it.
If on November 5, 2024,
- you receive your $500,000 ERC, you celebrate. You don’t need to do anything extra.
- you learn that the IRS rejected your ERC, you exercise your protective claim and obtain a $150,000 refund of the taxes you paid on May 15, 2024.
What About Corporations and Partnerships?
The IRS did not extend the 2020 filing dates for corporations and partnerships from their original due dates of either March 15 or April 15.
It’s possible that some of those businesses filed on time and missed the CARES Act requirement to amend their 2020 returns for the reduced wages. In those cases, if the failure to reduce the wages after the credit was calculated was intended to evade or defeat the tax, the statute of limitations does not apply, and the IRS can create collection actions at any time.
Planning note. If the corporation or partnership filed for an extension, it may have time to amend the 2020 returns for the ERC wage reduction and file a protective claim. In these cases, the extended date on which the return was filed triggers the end of the statute of limitations.
Takeaways
Deadline for Schedule C businesses. If you reported your business on Schedule C of your Form 1040, claimed the ERC for 2020, and didn’t adjust your 2020 wages accordingly, you must amend your 2020 tax return before the statute of limitations expires on either May 17, 2024, or later if you extended your 2020 return.
Proper filing is crucial to ensure compliance and avoid potential penalties.
Deadline for corporations and partnerships. Corporations and partnerships that filed their 2020 returns with extensions have until the extended file date to file their amended returns and protective claims. For those who filed on time or where the statute of limitations expired, failure to have the correct 2020 wages on the 2020 returns could lead to IRS action anytime if the omission was intended to evade taxes.
Cash. If you don’t have the cash to cover the additional taxes due with the amended return, consider borrowing or arranging a payment plan with the IRS.
Protective claim. To guard against the possibility of not receiving the ERC or receiving less than expected, file a protective claim. The claim creates insurance that you will achieve the proper tax and money results when the ERC is resolved.
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