In the rapidly evolving landscape of mergers and acquisitions (M&A), companies must remain vigilant to potential pitfalls that could impact their valuation and operational stability. A significant concern that has surfaced in recent months is the issue of questionable employee retention credit (ERC) claims. Initially introduced under the Coronavirus Aid, Relief, and Economic Security Act, the ERC was designed to provide financial relief to small businesses affected by the Covid-19 pandemic, potentially offering up to $26,000 per employee.
However, recent guidance from the IRS highlights a growing concern over the legitimacy of many of these claims, particularly in the context of M&A. The IRS has increased scrutiny and enforcement, including a yearlong moratorium on processing ERC claims, to combat troubling trends in business practices.
The risks associated with erroneous or fraudulent ERC claims are substantial. They can lead to significant discrepancies during the M&A due diligence process, potentially misleading prospective buyers. In instances where these claims are deemed ineligible, companies may face severe consequences, including repayment of credits, interest, penalties, and possible legal action.
- Enforcement risk: Companies risk audits, claim clawbacks, and possible civil or criminal penalties.
- Litigation risk: Erroneous claims could lead to lawsuits from stakeholders.
- Transaction risk: Questionable claims can affect how buyers perceive deal terms, potentially jeopardizing transactions.
- Reputational risk: Companies may face reputational damage if the dispute over ERC claims becomes public.
To mitigate these risks, experts advise companies to conduct thorough due diligence on their ERC claims, considering options such as withdrawing unsupported claims and disclosing potential issues to prospective buyers. Independent reviewers skilled in ERC claims can provide critical assessments, identify discrepancies, and offer strategic recommendations.
The complex nature of these claims necessitates a proactive and informed approach. By engaging independent experts to validate claims and ensuring transparency during M&A negotiations, companies may reduce associated risks and proceed with greater confidence.
For more comprehensive insights into navigating these challenges, visit the original analysis by Jesse R. Morton and Joe Kody at Bloomberg Tax here.