Don’t succumb to the ERC misinformation epidemic
By Randy Crabtree, CPA
July 5, 2023
Your business owner clients have no doubt been contacted by credit specialists and other pop-up shops anxious to help them get valuable tax credits for keeping their employees on the payroll during the pandemic. All the ads running on local radio, TV and social media are just adding fuel to the fire.
What they’re talking about, of course, is the Employee Retention Tax Credit (ERC). Of course, the ads and cold calls rarely mention the ERC by name and imply that these credits are something that many CPAs don’t know about.
Didn’t the ERC program sunset at the end of 2021?
Yes, it did, but you still have until April 2024 to amend 2020 quarterly returns and until April 2025 to amend 2021 returns and file a claim. Contrary to the advertisements, ERC money is not going to expire anytime soon. Take the time to get your study done right and see how the potential court cases play out.
Just remember your clients must legitimately qualify for ERC due to a government order that shut them down during the pandemic if they were deemed a non-essential business. Just because the pandemic made it tougher to do business during those dark days, doesn’t necessarily mean they qualify for ERC. And as I’ll get to in a minute, the IRS is cracking down on fraudulent or erroneous claims. Be sure to have an experienced and trustworthy provider assisting you — preferably one who knows what they’re doing and who will still be around in a few years if you are audited.
Another misleading aspect of the ubiquitous ERC ads is that providers want business owners to believe they can qualify for all six quarters that the program covered during the pandemic. That’s simply not true in many cases. For example, there’s a good chance that restaurants in heavily impacted states such as Illinois, California or New York would qualify for the full six quarters. But most businesses are part of lesser-impacted industries and qualify for a much shorter time period, and sometimes not at all.
Finally, the radio ads don’t tell you how long you’ll wait to receive your refund if you legitimately qualify for them. As my colleague
Nick Pantaleo, CPA, mentioned on a
recent podcast we did together, any credit more than $100,000 per quarter is subject to extra review. Expect delays of nine to twelve months for your refund to arrive.
Pantaleo said the IRS is shifting staff between phones and processing to accommodate demand as it is now very difficult to get through to the IRS. “But we’ve seen a wave of clients have their refunds processed that were waiting for seven months or so,” he said.
One size doesn’t fit all
Chris Wittich, CPA, Partner at Boyum Barenscheer, reminded my podcast listeners that every company’s situation is different. Unfortunately, pop-up shops tend to use generic arguments for each of their clients 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 use the claim enough, eventually it will stick, lamented Wittich. But the argument doesn’t necessarily apply to your client’s business and could result in a much smaller credit than they truly deserve.
Dan Chodan, CPA, Partner at Trout CPA, told me that 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 IRS audit,” said Chodan. “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.”
Both 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. Fortunately, it isn’t too late to pay the funds you received if you claimed a fraudulent tax position. Pantaleo said the IRS told him that business owners should simply explain the situation or put clerical error in the box that is used to describe the reasoning for the amendment when paying back the ERC. “We believe there’s a chance for leniency if you pay back a credit you aren’t entitled to. But keeping an erroneous credit that is later discovered in an audit will result in harsh consequences,” Pantaleo explained.
Key Takeaways
The IRS is cracking down hard on bogus ERC claims and auditors are being specially trained in this area, so make sure you have a provider to help you that knows what they’re doing — and will still be around to help you several years down the road. Contrary to what the ads may say, ERC money is not drying up soon. With that in mind, take your time to get your claim done right and always work with firms that will stand by you in an audit.
If your business was deemed non-essential and was significantly impacted by mandatory shutdowns or other pandemic-related factors, 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 you work with a provider that has your best interests in mind.
Randy Crabtree, CPA, is co-founder and partner of Tri-Merit Specialty Tax Professionals,
is a widely followed author, lecturer and host of “The Unique CPA” podcast.
