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IRS Warns Employers About This One Tactic to Claim Pandemic Tax Credit

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Quotes by Dean Zerbe, Former Senior Counsel to the U.S. Senate Finance Committee; alliantgroup National Managing Director

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Worker-safety guidelines arenโ€™t suspension orders, agency says, teeing up legal fight

A lot of federal money is riding on what counts as a government order, and the Internal Revenue Service and tax firms are preparing for legal fights about that crucial definition.

Employers can claim a pandemic-era tax credit worth up to $26,000 per worker if a government order fully or partially suspended their operations. Some employers and tax advisers say they can rely on Occupational Safety and Health Administration guidelines encouraging ventilation, physical distancing and other measures.

Nope, the IRS says.

The IRS argument, detailed in a recently published memo, is the latest sign of the tax agencyโ€™s tough line in audits of the employee retention credit, or ERC. The credit has cost the government at least $230 billion, roughly triple earlier estimates, after a cottage industry of firms popped up to help employers claim it. The IRS says fraud and ineligible claims are rampant, and it is now giving auditors a road map for denying refunds.

The IRS detailed its argument on OSHA guidelines more than three years after Congress created the credit in 2020.

โ€œWhat we are seeing right now is the IRS is basically taking a position to disallow everything,โ€ said Eric Stenson, co-founder of Arizona-based Stenson Tamaddon, which has worked on about 4,000 ERC claims. โ€œThey say you can bring it up on appeal or litigate it if you donโ€™t like it.โ€

Even before the memo, the IRS had halted processing of new ERC refunds, started thousands of audits and promised tougher scrutiny of unpaid claims. It will soon announce a program to let employers repay credits they now regret claiming.

To qualify for the ERC, employers have two routes. They can show a minimum specified revenue drop, an easy metric for the IRS to verify. Or they can show that a government order suspended their operations.

Some orders are obviously orders, such as a governorโ€™s closure of indoor dining. Others are gray areas.

Those making the argument for using OSHA guidelines note that employers can be fined for failing to protect workers and that many employers had to make meaningful changes to operations to comply.

In the memo, IRS attorney Rachel Leiser Levy disagrees.

โ€œThe OSHA communications explicitly do not command or mandate any employer to take any specific action, leaving it outside the ordinary meaning of the term โ€˜orders,โ€™โ€ she wrote.

The memo says employers may qualify for the ERC if a state or local government required compliance with OSHA guidelines. The memo doesnโ€™t apply in some healthcare settings.

Firms using the OSHA argument, at least in part, include Synergi Partners of South Carolina and Stenson Tamaddon. In standard language for clients, Synergi says โ€œthe OSHA directives, standing alone, constitute a โ€˜governmental orderโ€™โ€ for the ERC because they are enforceable with penalties. Still, the firms often donโ€™t rely solely on that argument, combining it with Centers for Disease Control and Prevention guidance and local orders.

โ€œWe take great pride in our meticulous approach to assessing whether an employer may be eligibleโ€ for the ERC, said Ashley Hogsette, chief legal officer of Synergi, which existed before the pandemic. โ€œOur review process involves a thorough analysis of multiple criteria, extending well beyond OSHA and CDC.โ€

Stenson, co-founder of the Arizona-based firm, which launched in February 2020, said the OSHA guidance โ€œwould not be our go-to order for most of the claims,โ€ but he said the combination of various laws and regulations can create the basis for an ERC claim. He worries that IRS field agents will misinterpret the guidance and not consider anything OSHA-related.

It is not known how many claims rely solely on OSHA guidance. Larry Gray, a partner with AGC CPA who reviews ERC claims for other accounting firms, said he has seen the use of OSHA guidance as the basis for ERC claims increase over the last six months.

IRS Commissioner Danny Werfel said Tuesday that the memo addresses an area where taxpayers have aggressively stretched definitions. โ€œFor example,โ€ he said, โ€œsimply wearing gloves and practicing routine hygiene practices like handwashing donโ€™t translate into a serious impact on a business to qualify for the credit.โ€

Some employers will hear about the IRS memo and decide that they donโ€™t want to take a stance contrary to the tax agencyโ€™s litigating position. That may lead them to withdraw claims or repay refunds.

โ€œIf youโ€™re basing it on an OSHA statement, you should sprint to go get somebody to review what youโ€™ve done,โ€ said Dean Zerbe of tax consulting firm alliantgroup.

Others will push into court, said Josh Ungerman, a tax lawyer at Meadows Collier in Dallas.

โ€œEvery time you have something like this,โ€ he said, โ€œthere are absolute die-hards who are not conflict-averse and who have high risk tolerance and who see this as: โ€˜We must be onto something good if the IRS is trying to shut it down.โ€™โ€

We have been working with scores of businesses and nonprofits that have taken ERC with โ€œpop upโ€ shop providers and now are waking up recognizing that all this may be too good to be true.

Featured Leadership

Dean Zerbe is alliantgroupโ€™s National Managing Director based in the firmโ€™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 โ€“ 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.

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