The Internal Revenue Service (IRS) has made it clear that crackdowns on ERTC abuse are coming. Hundreds of “pop-up” shops around the country are claiming to be able to garner huge refunds for clients.
Unfortunately, those same shops are not doing proper due diligence to make sure clients actually qualify, skipping over the nitty gritty, taking huge fees, and then requiring clients to sign liability waivers.
The likelihood that any of these “consultants” will be around by the time your tax client gets audited? Not very good.
Preparers need to educate clients on ERTC and warn of the dangers of working with so-called consultants when promises sound too good to be true.
The employee retention credit is not cut and dry. Leaving a lot of burnt out, overworked preparers weary of taking on the projects. Unfortunately, taxpayers really need good guidance to keep them pointed away from decisions that could cost them huge dollars in the future.
Many of the consulting style firms that have popped up are offering to calculate credits in exchange for a certain percentage as their fee. In other words, if a client is entitled to a $100,000 credit, the firm will take 20% and rake in a quick $20,000.
Typically, these firms are not guaranteeing the credit, sure they might make it sound more rosy by telling clients they only get paid when the client receives their refund, but what happens when the IRS comes back later on to collect it back when it turns out the qualifications were not actually met and the taxpayer has signed a waiver of liability with their so called expert.
Eligible employers must be able to document a number of facts. To begin with, you have to have retained your employees during the time period the credit applies to, which is essentially the last three quarters of 2020 and the first three quarters of 2021. The whole point of the credit is to reward and support businesses who did not do layoffs in spite of significant declines in revenue during the pandemic.
Preparers need to educate clients on ERTC and warn of the dangers of working with so-called consultants when promises sound too good to be true.
The decline in revenue is another key factor. Gross receipts in 2020 must be 50% or less than the gross receipts of the same quarter in 2019. In other words, if your client had gross revenue in quarter two of 2019 of $100,000, they must have made no more than $50,000 in gross revenue in quarter two of 2020 for that quarter to be eligible to be considered for the credit. The percentage decline for 2021 is lower and set at a 20% decline to qualify.
More factors. Your client must also have been subject to a full or partial shutdown as ordered by a governing body, either Federally or at the state level. Kicker…if your business was able to continue to fully operate because all your employees were able to switch to working remotely, you don’t meet the eligibility requirements in this case.
To make this more gray, the IRS issued guidance stating that if a business’ key suppliers were required to be shut down, that may also make the business eligible in this case because of serious disruptions in the supply chain. This one gets muddy and is probably the most challenging to document in the event of an audit.
The moral of the ERTC story is that the credit eligibility and calculation is clearly very confusing. This does not make a great setting for taxpayers to be able to decipher and correctly deal with this on their own. It is not all that surprising that clients are willing to share huge portions of their potentially giant refunds in exchange for someone taking care of this for them and essentially helping them collect free money.
Another caveat? Just in case you didn’t already need a flow chart to help figure this out. Payroll taxes already covered by any forgiven PPP loan monies are not eligible for ERTC either. Taking both would be double dipping on the same tax dollars.
And…income tax returns need to be amended to reflect the reduced payroll tax expenses if the client does indeed receive an ERTC refund check.
So now that you are completely overwhelmed by this credit, how can you help clients stay out of trouble?
- Warn them about “consultants” that seem to be experts suddenly in a credit that hasn’t been around long enough for anyone to be an expert.
- Educate them that if something sounds too good to be true, it probably is and proceed with caution.
- Remind clients that licensed CPAs cannot charge their clients a percentage of refund amounts, it violates our code of conduct so anyone using this fee model is likely not a licensed professional.
- Provide some quick tips like the items above to help clients quickly identify if they do or do not meet the core criteria.
- Consider (I know we’re all busy) offering services specific to calculating these credits. Clients need you.
