The IRS last fall issued IR-2022-183 warning against third parties improperly computing the Employee Retention Credit (ERC).¹ Then, the IRS issued a “renewed warning” in IR-2023-40 warning about promoters who aggressively mislead people and businesses into thinking they can claim these credits.²

The IRS took a bigger step this fall. On Sept. 14, 2023, the IRS issued IR-2023-169 with a moratorium on processing new ERC claims through at least the end of the year.³ All of this said, ERC qualifications have not changed, and you can still file.

In fact, the IRS is still encouraging businesses to file legitimate claims, but the agency is asking businesses to review their claims with a trusted tax professional who actually understands the complex ERC rules, not a promoter or marketer trying to make a quick buck.

This is being done so that the IRS can combat the “fly by night” providers and it will allow the IRS to:

1. Add more safeguards to prevent future abuse;
2. Protect businesses from predatory tactics; and
3. Allow time for the IRS to work with the Justice Department to combat aggressive marketing and incorrect ERC claims.

If you hadn’t heeded the warnings before, take the IRS’ latest release as a sign that it’s time to get serious. CPAs have a professional responsibility when they sign a return and that includes performing due diligence on third parties that are providing credit numbers.

ERC Horror Stories

Many promoters that sprung up during the pandemic are doing an ERC evaluation in minutes and claiming quarters without substantiation. Let’s look at a few actual case studies we have had from wary CPAs asking us for guidance before they signed their name on an amended return reflecting a large refund.

Commercial Retailer

This case involves a commercial retailer specializing in home goods. After responding to a brief questionnaire followed by a short phone call with an ERC provider, the retailer was told it qualified for all quarters in 2021 and that the business was entitled to more than $1MM in credits. Excited by the potential windfall, the retailer entered into an agreement with the ERC provider and excitedly called his CPA to give him the news.

The CPA was immediately skeptical about how little time and effort it took to make this determination. He knew it should take some time to properly conduct an ERC study. On top of that, the CPA also knew that few ERC claimants receive the max of $26,000 per employee. So, the CPA sought a “second opinion” on the original provider’s claim, with an examination of the following:

• Gross receipts? The retailer had no significant decline in gross receipts.
• Qualifying quarters? The retailer was located in two states where government orders did not extend into the third quarter of 2021, yet the ERC provider used Q3 in their calculation. Furthermore, the client had stated that any restrictions had ended in May 2021.
• Supply chain? There was no reference to the location of the retailer’s suppliers to substantiate any supply chain disruption, but the ERC provider claimed it under the partial suspension test.
• Qualifying mandates? There was no identification of any specific government order applicable to the retailer.
• More than nominal impact? The retailer estimated the impact in delayed work was 10% but the estimate was not substantiated.
• Substantiation and documentation? None of the information in the questionnaire completed by the retailer was substantiated by the ERC provider.

Thus, a $1MM credit did not exist. In this particular case, we engaged an outside law firm that was able to break the contract with the ERC provider so that the retailer would not be on the hook for more than $250,000 in fees. They have now engaged us to conduct a new ERC study.

Tool Manufacturer

This case involves a tool manufacturer based in a rural area. After a few short phone calls with an ERC provider, the manufacturer was informed it qualified for an ERC claim amounting to more than $750,000 based on canceled trade shows. The manufacturer signed an agreement with that ERC provider based on the estimate, then contacted their CPA about the windfall.

The CPA expressed skepticism immediately, concerned about the lack of evidence to substantiate a claim that large. He also knew that the manufacturer had not experienced a decline in revenue through the pandemic, raising further alarm. The CPA contacted alliantgroup for a second opinion to determine if this claim would stand up to scrutiny. Our analysis:

• Gross receipts? There was no significant decline in gross receipts.
• Qualifying business disruption? There was no evidence showing the trade shows were cancelled due to government orders, nor that the trade shows were cancelled generally.
• More than nominal impact? The analysis did not show a nexus between the closure of trade shows, nor the manufacturer’s supply chain issues and the manufacturer’s more than nominal impact.
• Qualifying mandates? The government order referenced was simply the emergency declaration, not a specific government order applicable to the manufacturer’s suppliers.
• Substantiation and documentation? The analysis stated that the manufacturer had to wait longer for materials but made no mention as to how long or how much longer they had to wait in comparison to 2019.

After a review of the ERC study and related documentation, we informed the manufacturer that the ERC study would not withstand IRS scrutiny in the event of an audit. As a result, we advised the manufacturer not to file the claim. They were able to disengage the ERC provider and legal action was taken to obtain a refund of the manufacturer’s down payment. Again, the manufacturer subsequently came to us to perform a new ERC study.

Moral of the Story

When it comes to the ERC, it’s the Wild, Wild West. The smell of gold (fast, easy fees) has lured these “pop-up” ERC providers to promise the world without doing the necessary and meticulous research and documentation to properly qualify and quantify a company for ERC.

The CPA may be stuck in the middle between a drooling client hungry for cash and the responsibility to perform due diligence before preparing and signing that tax return proposing a huge refund.

These cases exemplify the importance of consistently exercising one of our great CPA traits: “professional skepticism.” In doing so, along with thorough due diligence, we are able to ensure that our clients receive both the best answer and the most appropriate solutions for their specific situations.

Unless you have absolute comfort with your client’s ERC provider, a legal “second opinion” may be in order.

Rick Meyer, CPA, MBA, MST has served on various tax committees over the past 40-plus years. He is a director for alliantgroup, a national firm that works with businesses and their CPAs to identify powerful government-sponsored tax credits and incentives. For more information, email rick.meyer@alliantgroup.com.

1. Internal Revenue Service. “Employers warned to beware of third parties promoting improper Employee Retention Credit claims.” IR-2022-183. Oct. 19, 2022. https://www.irs.gov/newsroom/employers-warned-to-beware-of-third-parties-promoting-improper-employee-retention-credit-claims.
2. Internal Revenue Service. “IRS issues renewed warning on Employee Retention Credit claims; false claims generate compliance risk for people and businesses claiming credit improperly.” IR-2023-40. March 7, 2023. https://www.irs.gov/newsroom/irs-issues-renewed-warning-on-employee-retention-credit-claims-false-claims-generate-compliance-risk-for-people-and-businesses-claiming-credit-improperly.
3. Internal Revenue Service. “To protect taxpayers from scams, IRS orders immediate stop to new Employee Retention Credit processing amid surge of questionable claims; concerns from tax pros.” IR-2023-169. Sept. 14, 2023. https://www.irs.gov/newsroom/to-protect-taxpayers-from-scams-irs-orders-immediate-stop-to-new-employee-retention-credit-processing-amid-surge-of-questionable-claims-concerns-from-tax-pros.