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by Dean Zerbe, Former Senior Counsel to the U.S. Senate Finance Committee; alliantgroup National Managing Director
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The IRS today announced a withdrawal process for business owners/tax-exempt managers from their Employee Retention Credit (ERC) claims. The IRS has been taking a hard eye at ERC filings given the significant number of pop-up shop promoters that have been out there ringing the bell and engaged in aggressive marketing. In response to concerns about these fly-by-night organizations that tell business owners they can complete an ERC filing in minutes – the IRS issued on September 14, 2023 a moratorium on processing new ERC claims.
As I’ve written earlier, business owners need to be extremely eyes open about whether they qualify for the ERC or not. The IRS concerns about pop-up shop promoters is understandable. At alliantgroup we’ve been asked by our CPA partners to review their clients ERC filings – ERC filings that were put together by these promoters. What we’ve seen all too often from these promoters as to the ERC filings for their clients is blinking. Basic information – including particularly what specific Covid government order they are relying on for making the ERC claim – is missing (also – make sure it is an actual federal/state/local government Covid-related order that applies to your business – emphasis on “order” – not just a suggestion, policy or best practice – an order).
The IRS with the withdrawal process announced today is essentially giving business owners a chance to exit from the ERC process – and not get caught up in the maw of IRS examination and audit.
Next Steps For Business Owners
The bottom line is the ERC remains a balancing – while many businesses and tax exempts may qualify for the ERC – many businesses and tax exempts do not qualify. As the IRS itself states in today’s withdrawal notice: “The ERC is a complex credit with precise requirements to help businesses during the pandemic . . .” Emphasis on “complex.” If you were told that your ERC credit can be calculated in minutes – run, run now to have a tax professional knowledgeable in the ERC to have your ERC closely reviewed. With an independent review by a tax professional in hand a business owner can be in a better place to decide whether to withdraw or go forward (or alternatively what we also see after a review of an ERC claim – is to modify/limit an ERC claim to be in compliance with the law).
One quick indication that you may have gone down a bad path is if your business / tax exempt claimed 6 or 7 quarters for the ERC. alliantgroup has done a significant number of ERC claims and it is rare for us to have a client that qualifies for more than 1 – 3 quarters (with many qualifying for ERC for just one or two quarters). However, when we are asked to review the work of promoters – seeing 6 or 7 quarters being claimed for ERC is common.
Further, if the claim is you qualify for ERC because of a more than nominal impact on your business from a Covid-related order – how is the “more than nominal” documented and supported (and is it within the IRS safe harbor of a 10% impact on your business). Bottom line – how have you substantiated your “more than nominal” impact claim for the ERC?
In addition, if your ERC claim is based on supply chain and disruptions based on Covid order– be extremely careful. As I wrote in Forbes earlier this year, the IRS has put out useful guidance on making a claim based on supply chain disruptions – and highlights a lot of incorrect practices that promoters are using to improperly qualify unaware business owners for ERC.
These are just a few quick examples of indications that your ERC claim needs to be closely reviewed. This is the time to get right with the IRS – and ensure that you are properly claiming what your business qualifies for under the ERC – or to withdraw now if the facts and law don’t support your ERC claim. In the words of the Clash: Should I Stay Or Should I Go Now?
Withdrawal
The IRS today provides instructions on withdrawing an ERC claim. In short, for those who filed the ERC themselves and haven’t received, cashed or deposited a refund check – and have not been notified their claims is under audit can fax withdrawal requests to the IRS (IRS has a special fax line). For those who have already donated their fax machine to the museum – you can mail your request.
To elect to withdraw an ERC application – the IRS states that all of the following must apply – you made the claim on an adjusted employment tax return (Forms 941-X, 943-X, 944-X, CT-1X); you filed your adjusted return only to claim the ERC and made no other adjustments; you want to withdraw the entire amount of your ERC claim; and, the IRS has not paid your claim (or they did pay but you haven’t cashed the check). However, note — if you engaged in fraud, or conspired or assisted in the fraud withdrawal will not exempt you from potential criminal investigation and prosecution.
Also — business owners who have been notified they are under audit can send the withdrawal request to the assigned examiner or respond to the audit notice if no examiner has been assigned.
ERC — a great benefit for those who qualify. But for those who don’t – a good time to think again.
We have been working with scores of businesses and nonprofits that have taken ERC with “pop up” shop providers and now are waking up recognizing that all this may be too good to be true.
Featured Leadership
Dean Zerbe is alliantgroup’s National Managing Director based in the firm’s Washington D.C. office. Prior to joining alliantgroup, Mr. Zerbe was Senior Counsel and Tax Counsel to the U.S. Senate Committee on Finance. He worked closely with then-Chairman and current Ranking Member of the Finance Committee, Senator Charles Grassley (R-IA), on tax legislation. During his tenure on the Finance Committee, Mr. Zerbe was intimately involved with nearly every major piece of tax legislation that was signed into law – including the 2001 and 2003 tax reconciliation bills, the JOBS bill in 2004 (corporate tax reform), and the Pension Protection Act. Mr. Zerbe is a frequent speaker and author on the outlook for short-term and long-term changes in tax policy, as well as ways accounting firms can help their clients lower their tax bill.
