February 2023 – Risk Alert – Improper Positions on ERC Calculations

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RISK ALERT

IMPROPER POSITIONS ON ERC CALCULATIONS

In our June 2021 newsletter, we provided you an outline of the new requirements of the Employee Retention Credit (ERC) enhancements and requirements. Now, we want to reach out to you again as the AICPA (American Institute of CPAs) has recently published an article outlining the risks of improper Employee Retention Credit (ERC) calculations. Improper and inaccurate ERC calculations generate risk for both CPAs and credit recipients.

 

RISK TO CPAs

During the COVID-19 pandemic, we like many CPAs have assisted you, our clients, with ERC assessments based on the guidance available. However, we as CPAs are not the only parties providing this service – several third-party preparers have appeared and are advertising their ERC services to business owners by means of unsolicited emails, text messages, and even television commercials.

While our CPA firm has taken ERC positions substantiated by the legal and IRS guidance, other third-party preparers are taking improper positions. This creates scenarios in which clients we determined ineligible for the ERC could be evaluated by third-party preparers and deemed “eligible” for the credit based on inaccurate and risky positions.

In this scenario, our firm may be asked to prepare the amended payroll and/or income tax returns to claim the ERC for ineligible businesses. 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.

Please note, the IRS may take several years to fully audit the ERC applications. While these third-party ERC preparers should be held responsible for the improper ERCs they prepared, they may no longer be in business at the time you as our client may be audited. This leaves us as tax practitioners in the position to answer to the IRS for these improper ERC positions we did not initially prepare or support.

 

RISK TO CREDIT RECIPIENTS

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 very complex and should be performed by a reputable person or company. We have seen several 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.

If you used a third-party 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.

Please also note that the three-year statute of limitations for 2020 ERC filings expires in 2023. However in some cases, the IRS has up to five years to audit payroll tax returns claiming the ERC.

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.