THE IRS LAST FALL ISSUED IR-2022-183 WARNING AGAINST third parties improperly computing the Employee Retention Credit (ERC).1 Then, the IRS issued a “renewed warning” in IR-2023-40 warning about promoters who aggressively mislead people and businesses into thinking they can claim these credits.2 The IRS took a bigger step this fall. On Sept. 14, 2023, the IRS issued IR-2023-169 with a moratorium on processing new ERC claims through at least the end of the year.3 All of this said, ERC qualifications have not changed, and you can still file. In fact, the IRS is still encouraging businesses to file legitimate claims, but the agency is asking businesses to review their claims with a trusted tax professional who actually understands the complex ERC rules, not a promoter or marketer trying to make a quick buck. This is being done so that the IRS can combat the “fly by night” providers and it will allow the IRS to: 1. Add more safeguards to prevent future abuse; 2. Protect businesses from predatory tactics; and 3. Allow time for the IRS to work with the Justice Department to combat aggressive marketing and incorrect ERC claims. If you hadn’t heeded the warnings before, take the IRS’ latest release as a sign that it’s time to get serious. CPAs have a professional responsibility when they sign a return and that includes performing due diligence on third parties that are providing credit numbers. ERC Horror Stories Many promoters that sprung up during the pandemic are doing an ERC evaluation in minutes and claiming quarters without substantiation. Let’s look at a few actual case studies we have had from wary CPAs asking us for guidance before they signed their name on an amended return reflecting a large refund. COMMERCIAL RETAILER This case involves a commercial retailer specializing in home goods. After responding to a brief questionnaire followed by a short phone call with an ERC provider, the retailer was told it qualified for all quarters in 2021 and that the business was entitled to more than $1MM in credits. Excited by the potential windfall, the retailer entered into an agreement with the ERC provider and excitedly called his CPA to give him the news. The CPA was immediately skeptical about how little time and effort it took to make this determination. He knew it should take some time to properly conduct an ERC study. On top of that, the CPA also knew that few ERC claimants receive the max of $26,000 per employee. So, the CPA sought a “second opinion” on the original provider’s claim, with an examination of the following: Gross receipts? The retailer had no significant decline in gross receipts. Qualifying quarters? The retailer was located in two states where government orders did not extend into the third quarter of 2021, yet the ERC provider used Q3 in their calculation. Furthermore, the client had stated that any restrictions had ended in May 2021. Supply chain? There was no reference to the location of the retailer’s suppliers to substantiate any supply chain disruption, but the ERC provider claimed it under the partial suspension test. Qualifying mandates? There was no identification of any specific government order applicable to the retailer. More than nominal impact? The retailer estimated the impact in delayed work was 10% but the estimate was not substantiated. Substantiation and documentation? None of the information in the questionnaire completed by the retailer was substantiated by the ERC provider. Thus, a $1MM credit did not exist. In this particular case, we engaged an outside law firm that was able to break the contract BY RICK MEYER, CPA, MBA, MST, ALLIANTGROUP CONSIDER GETTING A “SECOND OPINION” IRS INTENSIFIES EFFORTS TO COMBAT ERC SCAMS 16 Nebraska CPA
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