The employee retention tax credits (ERTC) were wildly popular amongst employers, often resulting in significant dollars back to businesses claiming the credit. The expansion of credit provisions and the number of qualifying payroll quarters has led to millions of businesses taking a look at their qualifications for credit in order to get money back.
The biggest challenge with how ERTC credits were rolled out is the lack of information businesses have to provide to the IRS upfront. Businesses do not need to include on amended payroll tax forms any information about how they qualify for the credits.
Effectively forcing the Internal Revenue Service (IRS) to pay credit monies out and rely on audits later on to determine their validity. This has led to a massive amount of abuse and fraud that could take years to sort out.
Expanded provisions of ERTC allow employers to qualify on more “gray area” grounds. Businesses that were under government shutdown orders or who experienced certain issues in their supply chain may be eligible to claim the credits. This is more subjective and widens the pool of potential qualifiers from the original provisions that businesses must meet a specific decline in sales. It’s also harder to audit.
If you are assisting clients claiming the government shutdown test, ensure that this is well documented with published dates of actual government orders. Government (either Federal or state) orders are the minimum requirement for this test. General comments from local officials or any other governing body not authorized to effect or authorize such an order will not be sufficient to meet this test.
The biggest challenge with how ERTC credits were rolled out is the lack of information businesses have to provide to the IRS upfront. Businesses do not need to include on amended payroll tax forms any information about how they qualify for the credits.
The supply chain disruption test led to a huge number of businesses making the argument that they now qualify for the credits simply based on the fact that industries all over the world experienced massive supply chain disruptions during the pandemic.
Again, in these cases, employers need to show that the supply chain disruption was primarily due to the government shutdown orders, specifically disallowing suppliers to perform operations or deliver goods. Difficulty in obtaining the required PPE for meeting COVID restrictions in the workplace will, by itself, not meet the supply chain test to qualify for the credits.
To make matters worse, consulting companies are popping up all over, promising to get businesses hundreds of thousands of dollars worth of credit monies in exchange for a percentage of funds upon their receipt. These consultants, however, require liability waivers and are forcing business owners to agree to hold them harmless should the IRS come back and disagree with the position.
CPAs should make sure to ask business clients about ERTC and whether or not the organization plans to apply for credits. Helping them to ensure they are supporting the credits properly can provide a lot of value when they do not have the fear of audit stress later on. The IRS currently is increasing its resources to address the rampant fraud related to the credits.
Don’t forget, for clients that claim these credits, they must also reduce their deductions on business income tax returns for any payroll tax deduction that was taken and then credited back under ERTC.
