The Employee Retention Credit (ERC) program has helped stimulate various business sectors, offering financial aid to those that have encountered significant disruptions, complete or partial suspension, or suffered a substantial decline in gross receipts due to the pandemic. While efficacious, problems have pervaded the ERC landscape, including aggressive promotions, rules around eligibility, and inconsistencies in claim documentation.
One common deficiency points towards the ERC program’s requirement for taxpayers to evaluate whether they belong to a controlled or combined group, a rule that IRS Notice 2021-20 sheds light on. Unfortunately, these aggregation rules often get overlooked, causing a slew of erroneous claims to emerge.
Moreover, substantiating full or partial suspension requires taxpayers to present a valid order from a pertinent governmental authority. However, many taxpayers either lack such orders entirely, are unable to link the impactful order restrictions to their operational suspension, or base their eligibility on guidance that the IRS does not usually consider as valid orders.
In the Supply Chain General Legal Advice Memorandum, it is revealed that several taxpayers commonly cite supply chain disturbances in their eligibility claim, however, they often lack documentation proving these factors were in effect during the periods ERC was claimed.
Another area of concern is the absence of corroborative documentation to support claims. It is essential for taxpayers to be equipped with documentation substantiating their claims as the IRS won’t just ride on their assertions during audits.
A crucial point to keep in mind is the foundation of an eligible and compliant ERC claim is accurate documentation. The variances in practices among service providers can create problems and common deficiencies in ERC claim documentation, highlighting the importance of the expertise of qualified professionals.
In recent times, the IRS has put a moratorium on all new ERC claims processing, initiated a claim withdrawal process, and created a voluntary disclosure program in its battle against unscrupulous ERC claims. Furthermore, over 300 criminal cases have opened, and thousands of ERC claims have been sent for audit.
Last but not least, while ERC service providers offer significant aid, there is a great discrepancy in the roles and services they provide. Some service providers rely heavily on the taxpayer to confirm their understanding of the program and their eligibility for the credit. It is paramount for taxpayers to conduct a thorough analysis of their agreements with these providers and understand IRS requirements to make informed decisions.
Article authored by Justin Elanjian, managing director at Stout, who provides assistance to businesses with pandemic-related relief like the ERC and Paycheck Protection Program.