I have written recently that taxpayers need to beware of “too-good-to-be-true” pitches for the Employee Retention Credit (ERC) and that business owners need to be “eyes open” about whether they qualify for the ERC.
The IRS just recently put forward a new announcement outlining warning signs for business owners and tax exempts for ERC scams. The top three warning signs from the IRS were:
· Unsolicited calls or advertisements mentioning an “easy application process.”
· Statements that the promoter or company can determine ERC eligibility within minutes.
· Large upfront fees to claim the credit.
I would add two more that we see in our work as we are asked by CPAs to review their client’s ERC filing:
· Failure to tie the ERC claim to a specific covid-related government order (an order that had a more than nominal impact on the business or nonprofit). All too often, the promoters are basically citing to vague, general policy or guidance from CDC, OSHA or any other alphabet soup agency. No, no, no. It has to be an order – not a policy or guidance – that is due to covid – and that causes more than nominal impact on the business.
· Further, even if there is a covid-related government order – we commonly see a lack of substantiation of how the company was impacted by that order. A company may qualify for ERC, but will have a hard run qualifying and surviving an IRS examination if the impact of the covid-related order is not properly substantiated.
We are beginning to see the early signs of a strong IRS enforcement focus on ERC claims. The knocks on the door will come. For example, the IRS just put out guidance on when you can and cannot claim ERC due to supply chain disruptions. The Service has now made it clear that there are narrow scenarios where a supply chain disruption qualifies.
Supply chain disruptions by themselves do not qualify absent a relevant government order – you need to show that the supplier’s activities were fully or partially suspended during a calendar quarter due to orders from an appropriate government authority. Further, if the disruption was not to critical goods or materials or if the disruption did not impact the claimants operations, it does not qualify.
What To Do – IRS has not arrived but You are Afraid of a Future Visit
If you are reading all this and are now concerned that you may not be walking on the sunny side of the street with your ERC claim – all is not lost. The key is to get help and bring the matter to the IRS before the IRS is knocking.
We have been working with scores of businesses and nonprofits that have taken ERC with “pop up” shop providers and now are waking up recognizing that all this may be too good to be true. We have had good success in taking a hard look at the ERC claims made – and at times finding that while the company may not qualify at the level originally proposed with the previous provider – the company still may qualify for a lesser amount.
Obviously, in some cases we find that there is no support for the ERC claim. Here, we recommend that you take steps to get ahead of the problem – get expert advice and file an amendment either withdrawing the ERC claim and/or paying back the funds. Doing so will help go a long way to avoiding the big bill of additional penalties, interest and legal fees that can quickly pile up. But be sure to have someone reputable look at the claim before you determine to withdraw it.
It is also key to have your ducks in a row in terms of substantiating your eligibility for the ERC. We have seen – and the IRS guidance at Notice 2021-20 makes clear – that key is to create and maintain records that will show and prove the elements to qualify for ERC, including the following:
Documentation to show how the employer determined it was an eligible employer that paid qualified wages, including:
1) the actual government order that suspended the employer’s business operations.
2) any records that the employer relied up to determination more than a nominal portion of its operations were suspended due to the government order, or the order had more than a nominal effect on its business operations;
When it comes to the ERC — it won’t work to just run, hide and hope the IRS will go away. Best to face the music.
Read the full article here
