Planning to Apply?…Already Have?…Either Way, Heads-up

May 2023

Ads like the following are everywhere … TV, radio, print and social media. And the call-to-action is compelling.

Claim Your Business Tax Credit From the IRS!
If you own a business that had employees during the COVID-19 pandemic, contact us today to see if you qualify for up to $26,000 in tax credits per employee. This is not a loan, so there is no need to pay it back. Plus, we don’t get paid unless you are eligible and receive your credit.

You’re aware of, and perhaps responded to, solicitations by third-party advisers urging business owners to engage them to navigate the shoals of applying for the Employee Retention Credit (ERC). A “sweetener” is the promise of no up-front fees … just a share of the credit your company receives from the IRS.

As with any business decision, caveat emptor - buyer beware. With so many third-party companies aggressively pursuing this marketing opportunity, the profiles range from scammers to experts.

In this year’s annual Dirty Dozen summary, the IRS posted the following:

Employee Retention Credit claims
Taxpayers should be aware of aggressive pitches from scammers who promote large refunds related to the Employee Retention Credit (ERC). The warning follows blatant attempts by promoters to con ineligible people to claim the credit. The IRS highlighted these schemes from promoters who have been blasting ads on radio and the internet touting refunds involving Employee Retention Credits. These promotions can be based on inaccurate information related to eligibility for and computation of the credit. Additionally, some of these advertisements exist solely to collect the taxpayer’s personally identifiable information in exchange for false promises. The scammers then use the information to conduct identity theft.

In this piece, we offer a summary of the ERC requirements and benefits. Additionally, we’ll share some cautionary thoughts for those of you who are contemplating or have already enlisted the services of a third-party ERC adviser.

What is the ERC?

The ERC is a refundable payroll tax credit rewarding businesses that continued to pay employees while shut down due to the COVID-19 pandemic or had significant declines in gross receipts from March 13, 2020 to Dec. 31, 2021.
The credit may be as much as $5,000 per employee in 2020 and up to $7,000 per employee per quarter (for the first three quarters) in 2021. That could add up to a maximum credit of $26,000 per employee.
Eligible employers can claim the ERC on an original or adjusted employment tax return for a period within those dates.

Employer Eligibility: An employer is eligible for the ERC if it:

• Sustained a full or partial suspension of operations limiting commerce, travel or group meetings due to COVID-19 and orders from an appropriate governmental authority or,
• Experienced a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021 or,
• Qualified in the third or fourth quarters of 2021 as a recovery startup business.

Click here for more detail on each of the above eligibility requirements.

Filing Deadlines: Employers have until April 15, 2024, to file Form 941-X for the eligible quarters in 2020; and until April 15, 2025, for eligible quarters in 2021.

Note: Wages reported as payroll costs for PPP loan forgiveness or certain other tax credits can't be claimed for the ERC in any tax period.

Employers … Be Careful!

Third-party advisers are typically new operations put together to capitalize on the preparation of ERC applications for employers. Lack of experience along with aggressive marketing often results in improper advice regarding employer eligibility and computing the amount of credit claimed.

Employers must become aware of the risks associated with engaging third-party promoters. Here are four critical concerns to be addressed:

• Often, third-party advisers do not make it clear to employers that they will need to amend their business’s federal income tax return for the corresponding period because any payroll taxes used in the computation of the credit are no longer deductible.
• Receipt of the refund from the IRS does not preclude the agency from examining the employment tax return and disallowing the credit. Employers are always responsible for the accuracy of the information reported on their tax returns. Improperly claiming the ERC could result in repayment of the credit, plus penalties and interest.
• Employers that have received the ERC may be an audit target given the anticipated expansion of new IRS agent hires.
• In the event the IRS disallows the ERC claim, fees paid to third-party companies may not be refundable.

Employers Considering Engaging a Third-party Adviser
Here are performance criteria to help evaluate the value a prospective adviser brings to the strength of your company’s ERC qualifications, filing efforts and subsequent follow-up.

At your request, a legitimate capable adviser will:

1. Describe its history as tax advisers including whether the practice is exclusively devoted to ERC claims.
2. Detail their policy to provide audit defense plus refund fees if all or part of the ERC claim does not survive an IRS audit.
3. Not claim a high IRS audit success rate as the IRS audit program is so new that success claims are meaningless.
4. Demonstrate a solid understanding of the facts and circumstances of your business operations before the pandemic as well as during each quarter of the pandemic … with special attention to the wage limits during the first three quarters of 2021?
5. Prepare a written account of the specific state or local governmental orders your business was subject to and a description of the impact of each on your business operations.
6. Review with you any circumstances pertinent to your ERC claim where the IRS guidance regarding ERC eligibility is unclear and that the adviser’s interpretation may prompt scrutiny by the IRS.
7. Not present a sense of urgency for you to act by asserting the available funding for ERC claims is fast being depleted. Not so! See above for filing claims deadlines.
8. Make it clear to you that qualified wages applied in ERC computations are no longer deductible on your business income tax return

Employers Who Already Engaged a Third-party Adviser and Filed an ERC Claim
If you now have second thoughts about the advice that led up to your ERC claim filing, your best next step is to seek counsel from an independent tax adviser to review the merits of your claim and the adequacy of your documentation.

If your independent review results in the recommendation to amend or withdraw your ERC filing (Form 941-X), you may be able to sidestep interest and penalties … along with the time, expense and stress of an IRS audit.
Alternatively, if your independent review delivers written opinion that your claim has a solid foundation based on relevant ERC tax law … at the very least you will be able to demonstrate your intent to honestly pursue support of your claim with appropriate facts.

The above presentation is meant as an overview only.
Give us a call and we’ll quickly help you with questions.