The recent US Supreme Court decision in Loper Bright Enterprises v. Raimondo overturning Chevron deference, along with specific IRS policies, are influencing the assessment of Employee Retention Credit (ERC) claims. According to the IRS Policy Statement on the Tax Regulatory Process, the agency may be employing an unsustainable standard when evaluating ERC claims.
The IRS has primarily relied on Notice 2021-20, a 104-page sub-regulatory guidance, rather than the ERC statute codified in Section 3134 of the tax code. This notice has imposed additional rules not originally present in the statute, such as requiring businesses to demonstrate that a “partial suspension of operations” due to a government order had a “nominal impact” on their operations, quantified by more than 10% of their revenue or labor force. These specific requirements are creating distinct challenges for claimants.
The importance of Notice 2021-20’s status has been challenged legally, with plaintiffs contending it violates the Administrative Procedure Act (APA) for lack of proper notice and comment procedures. The Treasury Department in 2019 policy has articulated that sub-regulatory guidance should not independently affect taxpayer rights or obligations beyond what the underlying statutes stipulate.
The Supreme Court’s decision in Loper Bright has further amplified doubts about the reliance on sub-regulatory guidance for definitive legal standards. The ruling indicates that such guidance may hold even less significance, which could benefit ERC claimants challenging the IRS’s current assessment norms. This wave of scrutiny also raises questions about the enforceability of IRS actions against ERC promoters, suggesting their advice might align with the ERC statute or arise from a good faith belief in the unenforceability of Notice 2021-20.
As the IRS resumes processing some ERC claims, understanding the rules governing eligibility assessments remains crucial. This evolving legal landscape suggests potential relief for more ERC claimants and significant challenges for the IRS’s enforcement efforts.
For further information, see the full article on Bloomberg Tax.