Robert S. Schwartz, Esq. and Joseph M. Lemond, Esq.
In March we wrote to you about an unusual occasion to get IRS penalties paid money back from the federal government on account of a February U.S. Supreme Court decision in favor of the taxpayer owning overseas bank and investment accounts. This time we point out several other circumstances worth knowing about for affected taxpayers. In these instances, moreover, upon information and belief, Congress appropriates the funds for use by the IRS for just these purposes. It’s money in the bank.
The Employee Retention Credit
Congress enacted the Internal Revenue Code Section 3134 “Employee Retention Credit for…” money back program for businesses and tax-exempt organizations who had maintained their employee payrolls for at least some of the time between March, 2020, and December, 2021, despite COVID. Since this March, the popular media have been full of stories about employer internet filings for refunds because during 2020 and 2021 few had the chance to claim the refund contemporaneously with one or more of their 2020 and 2021 eligible quarters’ payroll tax deposits. Moreover, the law presents tricky conceptual understanding, calculation complexity, uncertainties as to such definitions as “qualifying employees” and “qualified wages”, and simply people being unavailable to grapple with these things, including the IRS people responsible for issuing necessary guidance. Contemporaneous action was largely impossible.
Media indications: we are witnessing a repeat of Congress having given a tax break inch, but taxpayers taking a tax break mile. Maybe; maybe not, is our view. Further, do not apply for a refund through an internet company. Employ your accountant. Anyway, the entry point is a full or partial federal, state or local government ordered suspension of employer commerce, travel, or group meetings due to COVID during one or more of eight calendar quarters falling in the period between March 12, 2020, and December 31, 2021. In some cases, this suspension determination is a given for at least some quarters such as for many employers located in New Jersey. For employers in other states, such as Florida, alternatively, preliminary calculations usually are necessary: an employer taxpayer had to have experienced on the per quarterly basis for 2020 a more than 50% decline in gross revenue compared to the same quarter in 2019. For 2021 quarters, the decline threshold is 20% compared to the comparable 2019 quarter or, if none, for the comparable 2020 quarter. After this, the employer’s refund calculations become more complicated and are different in one or more respects, depending on whether during 2019 an employer had on average 500 or more employees or 100 or more employees or was an employer that had just started business with employees beginning on or after February 15, 2020. Further calculations come into play for employers with multi-state employee locations or employers who had allocated some but not all employee wages to achieve “loan” forgiveness under Congress’ Payroll Protection Program. In the end, there are enough conceptual considerations, in addition to the computational, that tax lawyers can be helpful to get a refund request right.
Section 3134 is written such that, while the employee retention “credit” is against the employer’s FICA and FUTA taxes of about 9% of covered payroll incurred for quarters falling in the period March, 2020, through and December, 2021, nevertheless, the refund amount per quarter is allowed up to the lesser of (a) $7,000 per an employee’s quarterly qualified wages or (b) the employee’s actual quarterly qualified wages. The term “tax credit” is a misnomer. Self-employed people are not eligible for credits against their SECA taxes or any extra money. For employers, the refund claim filing deadline for 2020 quarters’ refunds is April 15, 2024; for 2021 quarters the deadline is April 15, 2025.
Recovery of Costs Paid to Defend, Appeal or Litigate an IRS Tax Audit
A taxpayer unfairly battered by an IRS audit may file an application with the IRS for the recovery of “administrative proceedings” costs incurred by the taxpayer either with respect to the IRS audit itself and also the appeal to the IRS Office of Appeals of audit disagreed issues or facts. Ordinarily, eligible costs consist of the hourly professional fees of the accounting and/or law firm engaged by the Taxpayer with respect to IRS administrative proceedings. Other eligible costs are customary and usual firm disbursements and other smaller charges to the taxpayer related to the said professional representation. An expert’s, if any, costs are covered, such as in valuation issues case.
The basic condition is ultimate taxpayer success on the most important legal or factual issues, usually determinable dollar wise. A second condition is that the IRS was not substantially justified in rejecting the taxpayer’s factual or legal audit positions concerning the most important legal or factual issues. This circumstance may be present at the audit level, but not at the appeals level, so recoverable costs are those incurred during the audit. A third condition is that the taxpayer does not exceed specified net worth and size limits as of the audit or appeal time frame. For business entities the net worth limit is $7 million, but determined by historic acquisition cost and contemporaneous long term liabilities, and another limit is 500 employees. So the average small business has been ordinarily eligible. For individuals, only a net worth limit is relevant, determined the same way, at $2 million per taxpayer or $4 million per joint return filing taxpayers. Taxpayer administrative proceedings and/or tax litigation professional and expert costs are capped at about $240 per hour.
If the IRS denies cost recovery for a qualifying taxpayer’s audit or appeal costs, the taxpayer may timely appeal the denial to the United States Tax Court pursuant to its special procedural rule 270. The court considers the case independently of IRS opinions. Alternatively for taxpayers who are bound for federal court tax litigation, after the petition or complaint is filed with the relevant federal court, provided the following conditions are met, the taxpayer may motion in court for recovery of both IRS administrative proceedings and litigation costs: (a) the taxpayer succeeded in the federal court on the most important disagreed legal or factual issues, (b) had exhausted IRS administrative proceedings before going to court, (c) is not the party responsible for unduly protracting the administrative proceedings, (d) did not exceed the size limits, and (e) the IRS positions were not substantially justified as to which the IRS has the burden of proof. The federal court considers the case independently of IRS opinions.
This writing is not and should not be interpreted as the rendering of legal advice or performance of legal services to any person by Herold Law, P.A. In accordance with professional ethical rules, Herold Law, P.A., renders legal advice and performs legal services only in the context of an attorney-client relationship entered into before rendering advice or performing services.