Latest Update on Employee Retention Credits
As most business owners are aware at this point, the Employee Retention Credit (ERC) is a refundable tax credit for businesses that had employees and were affected during the COVID-19 pandemic. Undoubtedly, at some point, you were solicited by an ERC promoter claiming that your business is entitled to receive large cash refunds of up to $26,000 per employee. ERC promoters have become extremely aggressive in their marketing campaigns, using e-mail, social media, television, radio, billboards, direct mail and telephone solicitation due to the large amount of dollars at stake.
These promoters charge exorbitant fees, typically as a percentage, often reaching 25% or 30% of the total ERC claim. These promoters, often referred to as “ERC mills” by the Internal Revenue Service (IRS), can use aggressive marketing techniques and unethical practices regarding ERC eligibility to lure businesses in to work with them.
There are strict eligibility rules that businesses must follow in order to make an ERC claim. To qualify for the credit, businesses must either (1) meet a revenue test, or (2) have their operations partially or fully suspended due to a governmental order. The latter is a somewhat subjective analysis, but there has been a significant amount of published guidance and eligibility criteria issued on this topic as a direct result of abuse in this area.
Commonly, ERC promoters work their way into a relationship after a business has discussed the ERC eligibility requirements with their CPA or tax attorney, and it was determined that eligibility criteria were not met. These promoters often make promises of eligibility and large cash refunds, often ignoring or incorrectly applying eligibility criteria and special rules, such as ERC interaction with Paycheck Protection Program (PPP) loans.
As a result of the program abuse by ERC promoters, the IRS initially issued a detailed memorandum on July 21, 2023, that addressed a lot of the improper and fraudulent filings being submitted through these ERC promoters. The most common form of abuse observed is the use of “supply chain disruptions” to establish eligibility for ERC. Both current and previous guidance have consistently stated that general supply chain disruptions do not result in ERC eligibility being met unless several other criteria are also met. The disruption must be due to a governmental order applicable to the supplier. In addition, the manufacturer’s business must be impacted and cease operations (full or partial suspension) due to the inability to obtain the supplier’s (or an alternative supplier’s) critical goods due to the governmental order.
The July 2023 guidance outlines various related scenarios and the relevant law and analysis in determining ERC eligibility that is often used in misleading ERC scams by promoters. With the ERC program starting to wind down, the IRS is receiving a flood of new filings, many of which are fraudulent. As a result, the IRS has imposed an immediate moratorium on processing new ERC claims through at least the end of 2023 (IR 2023-169, 9/14/2023).
The IRS will continue to process ERC claims filed before the moratorium on September 14, 2023. However, processing times will be increased from a “standard” of 90 days to 180 days and potentially much longer for claims flagged for further review or audit. As mentioned, any new claims filed after the moratorium will not be processed until at least the end of the calendar year.
It is also important to note that while the IRS is increasing the review/audit of ERC claims and focusing on combating fraudulent claims, there are businesses that still may qualify for the ERC credits under the law and recent guidance and should work with a professional to determine eligibility and submit a valid claim before the statute of limitations expires.
If you have been a victim of an ERC-related scam or have any questions relating to ERC eligibility, please contact our office so we may further assist you.
Contributing author: Brian J. Potter, CPA, CDA, is a tax partner at Dannible & McKee, LLP. Brian has over 17 years of experience providing tax and consulting services to a wide range of clients. He is responsible for overseeing tax engagements for a variety of the firm’s clientele with a focus on manufacturing firms, construction firms, multi-state corporations, and high net worth individuals. Brian has extensive experience in individual and corporate tax planning, financial planning, multi-state taxation, research and development tax credits, New York State income tax credits and ownership transition advisory.