Managing the ERC misinformation epidemic

Executive Summary

• The IRS is cracking down hard on bogus ERC claims. Auditors are being specially trained in this area.
• Make sure your clients have a provider to help them who knows what they’re doing—and will still be around to help them several years down the road.
• Contrary to what the ads may say, ERC money is not drying up soon. Advise your clients to take their time to get their claim done right, and always refer firms who will stand by your clients in case of an audit.

I’m sure you’ve heard the radio ads urging business owners to call the toll-free number immediately if they were impacted by COVID-19. “You could be entitled to up $26,000 per employee in refunds from the IRS. Call Today! Don’t Delay!”

The breathless announcer is, of course, referring to the Employee Retention Credit (ERC) or the Employee Retention Tax Credit (ERTC), even though the two acronyms are not mentioned by name. The nice people answering the toll-free phone number won’t require upfront fees from the business owner and promise to get them IRS money, even if they did or did not receive a Paycheck Protection Program loan.

You may have clients who have been contacted by credit specialists or other pop-up shops that sprung up since 2020. They promise to help businesses qualify for valuable tax credits as a result of keeping employees on the payroll during the pandemic.

Wait! Didn’t the ERC program sunset at the end of 2021? Yes, it did, but you still have several more years to amend your return and file a claim. Contrary to the ads, ERC money is not going to run out any time soon. You don’t need to act today “while operators are standing by.” Advise your clients to take the time to get their study done right and see how the potential court cases play out. Let’s see if any rulings come out that change the current IRS guidance.

Just remember, your clients must legitimately qualify for the credit. In most cases, they would have to meet the defined drop in revenue criteria or show they were shut down during the pandemic due to a government order. Just because the pandemic made it tougher to do business does not necessarily mean your clients qualify for the ERC. And the IRS is cracking down on fraudulent or erroneous claims, so be sure you have an experienced and trustworthy provider assisting you—preferably one who knows what they are doing and who will still be around in a few years, in case your clients are audited.

Another thing the radio ads won’t tell you about is how long it takes to receive a refund. This isn’t a scratch-off game! As my colleague Nick Pantaleo, mentioned on a recent podcast we did together, any credit more than $100,000 per quarter is subject to extra review. You should expect a delay of at least nine to 12 months for a refund to arrive. Another podcast panelist, Dan Chodan, a partner at Trout CPA, said: “We’re in a ‘holding pattern’ while all the IRS agents are being trained to do ERC audits.”

One size does not fit all

Chris Wittich, a partner at Boyum Barenscheer, reminded my podcast listeners that every company’s situation is different. But he said pop-up shops tend to rely on generic arguments, such as “supply chain disruption” or “OSHA restrictions.” Using a one-size-fits all solution is less work on the provider’s part, and they know if that if they use the claim enough, it will eventually stick, lamented Wittich. But the generic argument doesn’t necessarily apply to your client’s business and could result in a much smaller credit than they truly deserve.

Chodan said incorrect filings done by unqualified preparers, such as upstart credit companies, can make things “very ugly” from a financial reporting perspective. “Financial statement auditors are reviewing ERC claims to understand whether the position would be sustained on an IRS audit,” he added. “Ineligible claims must be recorded as liabilities and material noncompliance must be disclosed. These impacts will linger on financial statements for years to come over the audit statute period.

The IRS and AICPA have been calling for a crackdown on bogus ERC claims. As the old saying goes, if it sounds too good to be true it probably is. “I still get calls from clients who were up and running throughout the pandemic, but still think they you can get $26,000 per employee because the radio ad said so,” said Chodan.

Wittich reminds clients and other business owners that the IRS is coming hard after fraudulent claims. In audits, he said the IRS will be asking taxpayers how they found out about the ERC and who did their calculations. “You can’t always know who did the work just by looking at the 941X, since ERC shops often won’t sign the form,” said Wittich. “If they’re not willing to sign your 941X, why would you hire them to do your study? So if your provider can’t provide a specific executive order number or state order number, that’s a red flag, too, and you need to disengage.”

Be an advisor to your clients

The pandemic was tough on all of us. If your client’s business was deemed non-essential and significantly impacted by mandatory restrictions, then it’s worth looking into the ERC. Just know that the rules are complex and enforcement over fraudulent claims is getting tougher. Don’t go it alone. Make sure your clients work with a provider that has their best interests in mind—and will be around to assist down the road.