August 2023 – Risk Reminder – Improper Positions on ERC Calculations

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RISK REMINDER

IMPROPER POSITIONS ON ERC CALCULATIONS

In our February 2023 newsletter, we shared an article outlining the risks of improper Employee Retention Credit (ERC) calculations. Following up, the IRS recently published a memorandum clarifying the definition of an ERC-eligible employer.

As a reminder, improper and inaccurate ERC calculations generate risk for both CPAs and credit recipients. Additionally, the IRS has now published specific guidelines demonstrating situations in which an employer is (or is not) ERC-eligible.

 

RISKS TO US

During the COVID-19 pandemic, several third-party ERC pop-up shops appeared and advertised their ERC services to business owners by means of unsolicited emails, text messages, and even television commercials.

While our CPA firm has followed IRS and legal guidance for our ERC calculations, other third-party preparers took (and are still taking) improper positions. This creates scenarios in which clients we determined ineligible for the ERC could be evaluated by these third-party preparers and deemed “eligible” for the credit based on vague questionnaires and inaccurate information.

If a client is improperly deemed “eligible” for the ERC, our firm may then be asked to prepare the amended payroll and/or income tax returns to claim the ERC for an ineligible business. This imposes enormous risk on you as our client and our firm, as we both are placed in the position to file and sign a tax return with an improper ERC position.

 

RISKS TO YOU

The ERC was designed to assist you and your business in paying your employees continuously throughout the COVID-19 pandemic, and many business owners were able to maintain payroll for their employees as a result.

However, it should be noted that the rules for both assessing and calculating these credits are complex and should be performed by a reputable individual or company. We have seen numerous third-party ERC pop-up shops that are eager to take improper ERC positions for business owners when the business owner might not be eligible for the ERC at all. This could pose enormous risk to you and other business owners in terms of increased IRS scrutiny, IRS audits, penalties, ERC re-payment, and loss of future income tax deductions.

 

RECENT IRS PUBLICATIONS

In early August, the IRS Commissioner issued the following note: “The further we get from the pandemic, we believe the percentage of legitimate claims coming in is declining. Instead, we continue to see more and more questionable claims coming in following the onslaught of misleading marketing from promoters pushing businesses to apply. To address this, the IRS continues to intensify our compliance work in this area.”

In an effort to help further educate employers and ERC preparers, the IRS also published a memorandum outlining the definition of an ERC-eligible employer with specific regard to what constitutes an operational suspension. The IRS gives multiple specific examples in their memorandum.

The IRS is clearly aware of the situation created by these ERC pop-up shops and also stated the following: “The amount of misleading marketing around this credit is staggering, and it is creating an array of problems for tax professionals and the IRS while adding risk for businesses improperly claiming the credit. A terrible scenario is unfolding that hurts everyone involved — except the promoters.”

 

WHAT IS AN ERC-ELIGIBLE EMPLOYER?

As a reminder, not every business is eligible for the ERC. To qualify for the ERC, employers must have experienced full or partial suspension of their operations due to a government order, experienced a significant decline in gross receipts, OR qualified as a recovery startup business.

The IRS’s most recent article focuses on how to determine whether business operations were truly suspended. According to the IRS, an ERC-eligible employer is an employer who can prove with documentation that their operations were fully or partially suspended due to direct government orders affecting their operations.

This definition includes a provision for supply chain issues which must meet ALL of the following criteria: 

– The employer was unable to obtain the critical goods needed for operations from suppliers and had no alternative sources for the critical goods,

– The employer must then be able to show through documentation that their supplier was also suspended by a direct government order and that they had no alternative sources for the critical goods, and

– The employer must also prove that such critical goods contributed to no less than a “nominal” amount of gross revenue, which is defined as 10%.

If the employer can document and prove all of the above criteria, the employer can rightfully claim their operations were suspended by the government order related to COVID-19 for the specific time frame that the government order was in place.

This IRS definition is relevant because in several cases, third-party ERC pop-up shops determine ERC eligibility by asking vague questions such as “did COVID-19 affect your business”. If the client answered “yes”, the ERC shop would improperly deem them eligible for the ERC without asking additional questions related to the effect COVID-19 had on the business or determining whether operations were truly suspended per the IRS definition due to COVID-19.

 

STEPS TO TAKE

If you used a third-party preparer to obtain an ERC and you are concerned about your eligibility, please contact us. The IRS recommends that if the Employee Retention Credit was incorrectly claimed, business owners should file amended returns to correct their overstated wage deductions.

BEST PRACTICES

  • As always, choose your CPA carefully following this guide from the IRS.
  • Be wary of tax credit advertisements and opportunities from third-party preparers that seem too good to be true.
  • Consult us at Soukup, Bush & Associates regarding any concerns you may have about prior ERC filings.

As always, please feel free to reach out to us with any questions regarding this information.