Fiscal policy

The Employee Retention Tax Credit and Its Current State 

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Executive Summary 

  • The Employee Retention Tax Credit (ERTC) was a Covid-era credit passed under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in March of 2020. 
  • Despite the original prediction by the Congressional Budget Office (CBO) that there would be no budgetary effects by 2023, it is estimated that the ERTC cost $119 billion in 2023. 
  • This program has incurred increasing outlays from 2020 to now and may continue to do so in 2024, due to the large amounts of fraudulent claims, among other factors, despite the impending end of the program. 

Introduction 

In 2020, the Employee Retention Tax Credit (ERTC) was passed under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) as a refundable tax credit intended to incentivize businesses to maintain their employment levels throughout the Covid-19 pandemic. The ERTC was extended to December 2021 by the Consolidates Appropriations Act of 2021 (CAA) and the American Rescue Plan (ARP). The Infrastructure Investment and Jobs Act narrowed the requirements for eligibility for businesses able to file after October 2021. In their 2022 budget outlook, the Congressional Budget Office (CBO) expected the payments from ERTC to decline in 2022 and to have little to no budgetary effect in 2023. In 2023, the ERTC cost an estimated $119 billion, contrary to the CBO’s estimate. Additionally, the Internal Revenue Service (IRS) has taken action to combat the large amount of fraudulent claims of the ERTC, some of which may impact the total cost of the tax credit. Companies that are eligible to apply for this tax credit will be able to do so until April 2024 for 2020 claims and April 2025 for 2021 claims, unless the Tax Relief for American Families and Workers Act of 2024 passes, in which case the filing deadline will be January 2024 for all businesses. 

ERTC Today 

After being introduced and passed in the CARES Act in 2020, the ERTC was expanded by the CAA and ARP. Together, these bills extended the ERTC to 2021, causing an increased cost of about $31 billion (as estimated by the CBO), and bringing the project to an estimated $85 billion increase in the federal deficit. In 2021, the Infrastructure Investment and Jobs Act amended the ERTC so that businesses- excluding recovery startup businesses (businesses started during the Covid-19 pandemic with less than $1 million annual income, which could file for wages paid before December 2021)- could only file for wages paid before October 2021. These changes caused the CBO to predict a fall in the cost of refundable tax credits in 2022 due to the expected decrease in people and companies filing for US Coronavirus Refundable Credits (including ERTC). They also estimated that by 2023, the ERTC program would incur little to no cost. 

In January 2023, the CBO noted that although refundable tax credit outlays did decrease, their 2022 estimates were short $74 billion, with $29 billion of the difference coming from US Coronavirus Refundable Credits. In 2023 alone, ERTC is estimated to have cost by $119 billion.  

The IRS’s Reaction 

The Internal Revenue Service (IRS) took a moratorium from processing ERTC claims filed after September 2023 until January 25, 2024, due to the high volume of fraudulent claims. As of September 2023, 252 IRS investigations into ERTC fraud totaled over $2.8 billion. In December 2023, the IRS launched both the Employee Retention Credit Voluntary Disclosure Program (ERC-VDP) and a withdrawal program for ERTC. The withdrawal program allows businesses that fraudulently filed for ERTC to withdraw their claims if they had not yet received or cashed their ERTC check. These businesses will face no further penalties. 

The ERC-VDP caters to businesses that have received and cashed ERTC checks, but now feel that they may not qualify for the program. Businesses have until March 22, 2024, to file, must not have been under a criminal investigation by the IRS or notified that their ERTC has been disallowed. By voluntarily disclosing their claim, the businesses must pay back 80% of their ERTC. They do not have to pay back the interest that they may have received on the amount, the IRS will not charge penalties as long as the full 80% is paid back, and the 20% they get to keep is not taxable as income. 

Although the ERC-VDP will decrease the cost of the ERTC as people file, the 20% that the businesses that unrightfully claimed ERTC get to keep should be factored into all estimates regarding final costs of the ERTC program as businesses continue to file. 

Tax Relief for American Families and Workers Act of 2024 

 Currently, the deadline to claim the ERTC is April 15th, 2024, for claims for the year 2020, and April 15th, 2025, for claims for the year 2021. However, the House of Representatives recently passed the Tax Relief for American Families and Workers Act of 2024 (TRAFWA), which, if enacted, will make the deadline for all ERTC filings January 31, 2024, as well as increase the penalties for fraudulent ERTC claims. TRAWFA, if implemented, will secure greater repercussions for further uncovered fraud from the ERTC program. The success of TRAFWA may impact the cost of the ERTC in 2024.  

TRAFWA may prevent some businesses with valid claims to the ERTC tax from filing in time, although the cost of ERTC in the year 2024 is unclear. The CBO budget outlook for 2024 was released February 7, 2024. Their choice whether to include ERTC by name or bundled under US Coronavirus Refundable Credits may indicate the significance of ERTC outlays in their prediction for the coming year. Currently, if TRAFWA is passed, the Joint Committee on Taxation (JCT) estimates an increase in revenue of about $79 billion from 2024 to 2028 due to the filing deadline change for the ERTC and the end of the program in general.  

Looking back on Covid-19 pandemic related bills, including ERTC, in a few years will provide information to lawmakers about the benefits and consequences of tax credits in the modern age during times of crisis. The unexpected increase in cost, late filings, and fraudulent claims may influence new tax credit bills to increase their effectiveness. Regardless of the success of TRAFWA, filings for ERTC are predicted to slow down, especially after the first deadline in April 2024, allowing the total cost of the program to be accurately estimated as outlays eventually diminish and cease. 

Conclusion 

The ERTC, passed originally in 2020, has incurred increased costs over a year longer than predicted by the CBO. The ERTC cost $119 billion in 2023, despite CBO prediction that it would have no budgetary effect in the year. Now, as the deadline for filing for ERTC approaches, the total cost of the ERTC in 2024 is unclear. TRAFWA has the potential to change (perhaps drastically) the ERTC outlays in 2024, as if passed, it will move the deadline for filing up to January 31, 2024. The JCT estimates a $78,750 million increase in revenue over the next four years, if TRAFWA is implemented, due to this deadline change. This most likely will have an impact on outlays from the program in 2024- due to eligible businesses missing the deadline-, and will potentially end outlays in 2025, assuming all early 2024 filings are processed before the beginning of the year. The ERC-VDP should also be considered when calculating the final cost of ERTC, as businesses which filed improper claims are given the opportunity to keep some of the tax credit.