On September 14th of this year the IRS announced a “moratorium” on processing any new Employee Retention Tax Credit (ERC) claims/refund requests until “sometime after the end of this year.” They did indicate that they will continue processing ERC claims which they had received by September 14th, but that they intended to review them more closely, and as such, employers can expect that their pending ERC claims will take longer to process and refund out—-to perhaps 180 days or longer. The purpose of this PayDay is to provide information about the ERC program to our clients/others and also provide advice as to suggested action steps which employers should now take with regard to the Employee Retention Tax credit process.
SO WHAT’S ALL THE FUSS ABOUT?
The IRS has been increasingly and continually warning for some time now about what they refer to as “ERC mills,” which the IRS feels are encouraging employers to file “push the envelope” ERC claims for significant contingent fees. The IRS said “we want to protect against fraud but also protect employers from facing penalties/interest payments stemming from the filing of “bad claims” pushed by “promoters.” IRS Commissioner Danny Warfel said that “employers should seek out a trusted tax professional who actually understands the complex rules of Employee Retention Tax credits and not use promoters or marketers who are “hustling to get a hefty contingent fee.”
CURRENT ERC STATS AS RELEASED BY THE IRS
The IRS released the following statistics about the ERC program, which was enacted as part of the CARES Act, in March of 2020 (same time as the PPP loan program):
- The IRS has received about 3.6 million ERC claims to date, with many more flooding in as the filing deadline approaches for 2020 ERC claims (deadline is April 15, 2024)
- The IRS has already paid out over 3X more in ERC claims, to date, than was originally budgeted for the entire ERC program.
- The IRS is currently working on over 250 criminal investigations and “1,000’s” of ERC claims have been referred for civil audits.
IRS LISTS SOME WARNING SIGNS FOR EMPLOYERS TO ENSURE ACCURATE ERC CLAIMS
The IRS has warned that some of the following characteristics could mean that an ERC claim is being pushed by an “ERC mill”:
- The promoter says the application process is “quick and easy”—takes 10 minutes or less. REALITY—-The employee retention tax credit is complex “tax law,” as to both “qualifications/eligibility,” and as to actual ERC calculations-—Accurate determination of whether an employer qualifies for the ERC tax credit is complex, not “quick or easy,” and the actual ERC tax credit calculations are also complex, in particular if the employer has received one or more PPP loans—lots of tax law concepts and spreadsheet calculations!
- The IRS has warned employers to steer clear of promoters who want large upfront fees or exorbitant contingency fees of 15-25% or even greater.
- An ERC promoter who indicates that they are not providing “tax advice” (ERC tax credits are tax law) and/or they will not sign the employer’s 941X amended tax returns is sketchy.
- If the ERC claim involves “suspensions of operations by COVID government orders,” the ERC firm should provide copies of the actual government orders to the employer. This is especially true for “supply chain restrictions”——-you need the orders shutting down/suspending your suppliers!
SUPPLY CHAIN SUSPENSIONS/RESTRICTIONS FOR ERC TAX CREDITS
Many ERC promoters use “supply chain suspensions/restrictions” to claim ERC money IF they cannot qualify the employer based on the more common “significant decline in gross receipts” test or other obvious COVID government ordered suspensions such as government mandated restrictions on inside dining for restaurants. The IRS is very aware that “supply chain suspensions” have been used as the default ERC qualifier when nothing else can be found. Here is some commentary and even examples which the IRS has released recently pertaining to ERC claims based on supply chain restrictions:
- The IRS says “be wary of promoters who qualify you based on supply chain issues“—that is the “default” ERC qualifier when nothing else can be found.
- The IRS has indicated that a “narrow, limited exception” applies to claim the ERC tax credit based on supply chain suspensions, but that supply chain suspensions only qualify for ERC if the employer was not able to operate their business without the supplier’s products.
Some examples the IRS has released as not qualifying for ERC based on supply chain suspensions are the following:
- Employer does not have, cannot procure, a COVID government order which restricted the supplier for a specific timeframe—you need the actual government order to as proof!
- Goods stuck at port—truck drivers out sick due to COVID—not good enough, where is the precise government order restricting the employer from producing goods?
- Alternate suppliers can be sourced but the goods cost more money and the employer is not as profitable—-this does not constitute a COVID government ordered “suspension.”
The IRS updated their “FAQ’s pertaining to “supply chain suspensions” on September 14, 2023—–if you have applied for ERC based on supply chain disruptions, or are planning on doing so, please read the updated list of IRS FAQ’s first!
BE CAREFUL OF CLAIMING ERC CREDITS BASED ON A VAGUE LIST OF “GOVERNMENT ORDERED SUSPENSIONS TO YOUR OPERATIONS”
The IRS previously updated their ERC FAQ’s on July 28th of this year to clarify what constitutes ERC eligibility based on operational suspensions by government order. Here are some excerpts:
- Recommendations are not orders—-following the CDC’s recommendations for COVID protections are not “government orders”—GET COPIES OF ALL GOVERNMENT ORDERS.
- The IRS has clarified that transitioning from “in office” work to work from home is generally not a COVID government order which impacts operations more than “nominally.”
- Not being able to attend some meetings in person, but doing so via Zoom, virtually, is generally not a qualifying suspension.
- Public “stay at home” orders are not COVID 19 specific mandates/orders on an employer.
- Requiring masks, sanitizing, etc. seldom qualify as government orders suspending an employer’s operations.
THE IRS IS WORKING ON PROGRAMS TO ENABLE EMPLOYERS TO PAY BACK PREVIOUS ERC MONEY RECEIVED AND/OR TO CANCEL PENDING ERC CLAIMS
Included in the IRS announcement on September 14th about their moratorium was information indicating that the IRS is working out the details in which employers can repay prior ERC refunds received and/or to “pull,” cancel any pending ERC claims which are in the IRS processing queue. The IRS has intimated that these programs will include details as to how previous ERC funds can be repaid and pending claims cancelled without any penalties or interest to the employers.
ACCUPAY’S EXPERIENCE WITH THE ERC PROGRAM AND THE THOUSANDS OF ERC PROMOTERS
We have been studying the ERC statute (Code Section 3134 of the Internal Revenue Code) since it was enacted in March of 2020 by the CARES Act and when it was greatly expanded on December 27, 2020, as part of the Consolidated Appropriations Act (which for the first time enabled employers who had received a PPP loan to also be eligible for ERC tax credits). We did claim a handful of ERC tax credits during 2020 for employers who did not draw down PPP loans, but most employers chose PPP loans over ERC credits (correctly so). Once PPP loan recipients could also claim ERC tax credits IF they were eligible, we researched and studied the ERC tax credit provisions in more detail so we could be a resource to payroll clients of AccuPay. We collaborated with our clients’ CPA firms in claiming the ERC credits, educated our clients, had numerous discussions with “thought leaders” as to ERC tax law (mostly large CPA/consulting firms), and simply tried to be a resource to our employer-clients so they could claim ERC tax credits to which they were entitled. During the Spring of 2021, we had some clients who reached out to us for “A to Z” ERC work, to determine whether they qualified (many did not, many did) and to make the ERC tax credit calculations, file the actual 941X forms and to monitor the IRS systems to ensure clients got the ERC tax credits to which they were entitled (some early ERC claims took over a year to refund out). We made the decision to help our clients with ERC, learn as much as we could, but we only worked with clients of AccuPay who wanted us to help them with obtaining ERC funds to which they were entitled.
The so called “ERC mills” were hard to find during 2021, since most advisors and employers were learning the ERC rules, and studying ERC tax law to determine who qualified and who did not. It seems that the “ERC mills” “jumped on the bandwagon” during 2022 and have increasingly grown from last year into this year-–procuring ERC tax refunds has become a “cottage industry” in which the “mills” are very aggressive at promoting the ERC program, charge contingent fees of 15-25%+, and pay referral fees to an “army” of “ERC experts” around the USA to recruit as many employers as possible. I have personally spoken with several of the ERC promoters, none of whom knew much at all about the ERC law or eligibility—I have heard of some firms which have never turned down any employer from ERC eligibility––At the request of some of our clients who went with ERC “mills,” I have reviewed the ERC writeups, many of which prepared a long list of COVID “nuisances,” sort of a “throw enough things up on the wall to see what sticks” approach to ERC eligibility—-if you were impacted by COVID in any way (all of us were), you “qualified” for significant ERC tax credits.
AccuPay is open to answering any/all questions about ERC claims—contact your payroll specialist or email Larry Shaub at firstname.lastname@example.org
WHAT SHOULD EMPLOYERS DO NOW IN LIGHT OF THE RECENT IRS MORATORIUM?
The Employee Retention Tax Credit is a significant IRS refund to those employers who qualify for the credit—–EVERY EMPLOYER SHOULD REVIEW THEIR ERC ELIGIBILITY WITH A TAX PROFESSIONAL. We have filed several hundred ERC claims for clients of AccuPay, but have done so carefully as to both qualifying criteria and ERC credit calculations—Make sure you apply for ERC tax credits if you are eligible!!
Employers who think they may have filed inaccurate claims (mostly based on eligibility) should hire a tax professional/third party to review their ERC claims and fact patterns. Employers who filed claims based on government ordered COVID suspensions to operations should be able to find the actual “orders/mandates”—-from their state government, county public health department, city orders, etc—-make sure you have copies of government orders to prove your claim to ERC tax credits.
Employers who have received ERC money or have pending ERC claims in the IRS queue should wait for forthcoming IRS details about repayment procedures—-hopefully with no penalties or interest—in the meantime, hire your CPA or other tax professional to review your ERC claim and obtain a “second opinion.”
Employers who have pending ERC claims which they feel comfortable meet the ERC eligibility need to be patient as the IRS processes about 40,000 claims per week out of a current reported backlog of 600,000 ERC claims yet to be processed.
SOME RECENT IRS MEMOS, FAQ’S, ETC ABOUT THE EMPLOYEE RETENTION CREDIT AND THE MORATORIUM—-FOR YOUR READING
This PayDay is for educational purposes only and does not constitute tax and/or legal advice. Any links to external resources are for educational purposes only. AccuPay is not affiliated with nor receives any renumeration from any outside sources. Please consult with your tax and/or legal advisor before applying any suggestions made here or through external links.