Disclosures Fall 2023Disclosures Fall 2023

Horror stories from the wild West of ERC claimsThe IRS’s decision this fall to pause ERC processing is an effort to combat bad actors preying on small businesses. CPAs need to use professional skepticism when approaching these claims.Author_HeadshotBy Rick Meyer, CPA, MBA, MST
In October 2022, the IRS issued IR-2022-183 warning against third parties improperly computing the Employee Retention Credit (ERC). Then, the IRS issued a "renewed warning" in March 2023 (IR-2023-40) cautioning about promoters who aggressively mislead people and businesses into thinking they can claim these credits.
The IRS is now taking a bigger step. On Sept. 14, 2023, the IRS issued IR-2023-169 announcing a moratorium on processing new ERC claims through at least the end of the year. But don't freak out! ERC qualifications have not changed, and you can still file.
In fact, the IRS is still encouraging businesses to file legitimate claims — but it is asking businesses to review their claims with a trusted tax professional who actually understands the complex ERC rules, not a promoter or marketer trying to make a quick buck.
The IRS is actively combatting the "fly by night" providers by:

Adding more safeguards to prevent future abuse.

Protecting businesses from predatory tactics.

Allowing time for the agency to work with the U.S. Department of Justice to combat aggressive marketing and incorrect ERC claims.

If you hadn’t heeded the warnings before, take the IRS’s latest as a sign that it’s time to be serious. CPAs have a professional responsibility when they sign a return, and that includes doing due diligence on third parties that are providing credit numbers.

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ERC horror stories Many promoters that sprung up during the pandemic do an ERC evaluation in minutes and claim quarters without substantiation. Here a few actual case studies from wary CPAs asking us for guidance before they signed their name on an amended return reflecting a large refund.
Commercial retailer located in AlabamaThe retailer entered into an agreement with an ERC provider. After responding to a brief questionnaire followed by a short phone call with the ERC provider, the retailer was told it qualified for all quarters in 2021 and that the ERC would be more than $1 million!
The CPA and business owner were skeptical on how little time and effort it took to make this determination. So, they came to us for a “second opinion.” Below is a synopsis of the analysis that showed that the work product fell far short of what the IRS requires to substantiate an ERC claim.

Gross receipts: There was no significant decline in gross receipts.

Qualifying quarters: The retailer was located in Alabama and Florida, two states in which government orders did not extend into the third quarter of 2021, yet the ERC provider used claimed Q3 in their calculation. Furthermore, the client stated that COVID-related restrictions for them ended in May 2021.

Supply chain: There was no reference to the location of the retailer’s suppliers to substantiate any supply chain disruption, but the ERC provider claimed it under the partial suspension test.

Qualifying mandates: There was no identification of any specific government order applicable to the retailer.

More-than-nominal impact: The retailer estimated the impact in delayed work was 10%, but there was no substantiation.

Substantiation and documentation: None of the information in the questionnaire completed by the retailer was substantiated by the ERC provider.

Thus, there was no $1 million credit here. We engaged an outside law firm that was able to break the contract with this ERC provider so that they would not be on the hook for more than $250,000 in fees. They have now engaged us to conduct a new ERC study the right way.
Tool and equipment manufacturer in MontanaThe manufacturer signed an agreement with an ERC provider. After a few phone calls with the ERC provider, the manufacturer was informed it qualified for an ERC claim totaling more than $750,000 based on canceled trade shows. The manufacturer contacted its CPA about the windfall, who expressed skepticism and contacted us for our thoughts. We advised the manufacturer and the CPA on a second opinion.
After a review of the ERC study and related documentation, we informed the manufacturer that the ERC study would not withstand IRS scrutiny in the event of an audit. Our analysis:

Qualifying business disruption: There was no evidence showing the trade shows were cancelled due to government orders, and not even evidence showing the trade shows were cancelled!

More-than-nominal impact: The analysis did not show a nexus between the closure of trade shows, nor the manufacturer’s supply chain issues and the manufacturer’s more-than-nominal impact.

Qualifying mandates: The governmental order referenced was simply the emergency declaration, not a specific governmental order applicable to the manufacturer’s suppliers.

Substantiation and documentation: The analysis stated that the manufacturer had to wait longer for materials but made no mention as to how long or how much longer they had to wait in comparison to 2019.

As a result, we advised the manufacturer not to file the claim. They were able to disengage the ERC provider and law firm was able to get the manufacturer’s down payment refunded. Again, the manufacturer subsequently came to us to do a new ERC study correctly.
Moral of the storyWhen it comes to the ERC, it’s the wild, wild west. The smell of gold (fast, easy fees) has lured these “pop-up” ERC providers to promise the world without doing the necessary, exact, and meticulous research and documentation to properly qualify and quantify a company for ERC.
The CPA may be stuck in the middle, between a drooling client hungry for a cash refund, and their due diligence responsibility before preparing and signing that tax return proposing a huge refund.
Like it or not, the facts are the facts. Sometimes we have good news and sometimes we have bad. Either way, we must continue to exercise our great CPA personality trait, using “professional skepticism” and due diligence to get our clients both the best and the right answer.
Unless you have absolute comfort with your client’s ERC provider, maybe a legal “second opinion” is in order.

8Rick Meyer, CPA, MBA, MST is a long time member of the Illinois CPA Society and has served on various tax committees over the past 40+ years. He is a director for alliantgroup, a national firm that works with businesses and their CPAs to identify powerful government-sponsored tax credits and incentives. rick.meyer@alliantgroup.comDisclosures Fall 2023 | CoverCAMICODisclosures Fall 2023 | Table of ContentsVSCPA MastheadDisclosures Fall 2023 | From the CEOThomson ConsultingDisclosures Fall 2023 | Line ItemsDisclosures Fall 2023 | Line Items (cont'd)Disclosures Fall 2023 | CPA PipelineDisclosures Fall 2023 | CPA Pipeline (cont'd)Paychex AdDisclosures Fall 2023 | CPA Pipeline (cont'd)Disclosures Fall 2023 | TaxationSage AdDisclosures Fall 2023 | Taxation (cont'd)Disclosures Fall 2023 | Taxation (cont'd)Disclosures Fall 2023 | Taxation (cont'd)Disclosures Fall 2023 | EthicsDisclosures Fall 2023 | Cover FeatureDisclosures Fall 2023 | ManagementDisclosures Fall 2023 | Feature 2Employee Benefits of VirginiaVSCPA House Ad: Accounting Careers MonthDisclosures Fall 2023 | Feature 3Disclosures Fall 2023 | Feature 3 (cont'd)VSCPA Essential EthicsDisclosures Fall 2023 | SpotlightDisclosures Fall 2023 | SpotlightHalf Page Ad SampleDisclosures Fall 2023 | VSCPA NewsAPSDisclosures Fall 2023 | Back Cover