The IRS has stunned the accounting world by temporarily freezing the processing of new claims for a Covid-19 relief program known as the employee retention credit. This moratorium should encourage companies to review requirements for ERC eligibility and take steps to show evidence of eligibility if they file a refund claim.
Tax professionals have been begging the IRS for years to stop the overselling of the ERC by sophisticated sales—not accounting—organizations. The IRS’s claims processing pause benefits the employer and will prevent more ill-advised claims.
Ironically, most aggressive selling began after the pandemic. This aid was meant for organizations that suffered due to, and during, the Covid-19 pandemic. However, many entities that thrived during the pandemic have also received aid. This will hurt many people, for multiple reasons.
First, it’s costing taxpayers billions. Second, the employers who fell prey to greedy impulses will encounter interest and penalties when they’re audited. They may not be able to recover fees from the credit firms they used.
Also, ethical accountants are weary from explaining to clients that they’ve been misled or even swindled. Sometimes, accounting firms must resign clients who don’t accept their guidance. Accounting firms will be stuck with the fallout from bad claims and the resulting higher insurance premiums that inevitably are passed on to tax clients.
But will the bad actors pay? Sadly, ERC mills often have contracts that protect them by putting layers between them and any signed tax returns. Their sales contracts read like a direct-selling organization document.
While that may work for multi-level marketing companies, it’s inappropriate and unethical to sell tax refunds. The sellers don’t sign anything but the fee agreement, and the small print leaves eligibility determination in the employer’s hands.
If the IRS audits happen soon, they could bring consequences for unscrupulous sellers. Some of their contracts offer IRS audit support. Some credit firms will return their fees and commissions, while others will head for the hills.
The sub-standard work isn’t just provided by credit-only firms. Employers should note that payroll platforms are providing technology, not advice. Payroll services have also used contracts that leave complex eligibility decisions to the client. They’ll file the refund claim but won’t take any responsibility for the validity of the refund.
There are two ways to qualify for ERC refunds. One is a straightforward gross receipts decline. The other, when an entity is subjected to a partial suspension of operations due to a government order, is where fraud and misconception can abound. Entities must be under orders and suffer direct impact from Covid-19—satisfying one of those two conditions isn’t enough.
There’s no need to fret if a refund claim is valid. The due dates for 2020 and 2021 refund filings are April 15, 2024, and April 15, 2025, respectively. Claims should still be prepared for eligible organizations.
However, refund claims based on gray area or facts and circumstances should cause nerves to jangle, particularly if there are more circumstances than metric facts.
What to do? Organizations that have determined eligibility based on flimsy suspension of operations should immediately confirm they have both orders and impact:
- Understand that government orders aren’t recommendations or guidance. They’re statutory and legally enforceable.
- Print and save orders, as links are expiring, and highlight applicable sections.
- Check that start and end dates of applicable orders tie to impact in that period.
- Directly link orders to evidence a portion of the business was suspended—not merely disrupted. Telework is disruptive but doesn’t qualify as suspension of business.
- Show that orders affect the organization’s workers rather than its customers.
- For supply chain disruptions, prove the supplier was complying with a specific order and that orders couldn’t be fulfilled by an alternative vendor.
- Have metric evidence the business was more than nominally impacted. The IRS has indicated that more than nominal is defined as a more than 10% overall organizational impact, as compared with the same period in 2019. They want to see that 10% in dollars and hours.
- Focus on providing metric and factual analysis rather than a vague narrative about the pandemic’s impact.
- Create an analysis of hours and revenue impact in dollars and numbers.
- Avoid federal guidance, news articles, and foreign orders.
ERC claims are for organizations that were hit hard by the pandemic. For those that filed or received a payroll refund that felt too good to be true, it probably was.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Jenn McCabe is a partner in Armanino’s business outsourcing services practice, with more than 25 years of outsourced accounting and finance experience, including expertise in startups and the advertising and creative production industries.
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