Employee Retention Credit – IRS Audit Updates CADA

The dealership community has been targeted by Employee Retention Credit (ERC) “shops” for the last couple of years with promises of sums of money on top of PPP funds (rounds 1 and 2). While this is a legitimate credit that has provided a financial lifeline to millions of businesses, there continue to be promoters who aggressively mislead people and businesses into thinking they can claim these credits. ERC eligibility has been a hot topic of discussion amongst dealers, tax professionals and more recently the IRS.

The IRS has also taken notice of the number of claims and those going the route of claims involving chip shortages in reference to supply chain issues. They have issued several press releases in the last six months. As of March 20th, the IRS has published 5 documents expressing that the ERC is rife with fraud, adding it to their list of “dirty dozen” areas of audit. This is never a good sign. It is estimated they have assigned 300 auditors to this effort. In nature these investigations are for fraud and are both civil and criminal. Letters have also been issued to tax professionals to exercise due care in filing tax returns including these claims. In short, many tax professionals may be required to either avoid filing or disclose the claims to the IRS. This will leave many with exposure for audit or left in the dust regarding filing requirements. Monetary exposure for improper claims can also exceed penalties and interest.

For Colorado dealers, if the gross receipts test is not met in any of the periods eligible, it is important to distinguish your tie to a government shutdown that led to a full or partial suspension of business operations. In addition, for those claiming the supply chain exception, tread carefully. Audits underway have IRS agents claiming that vague and generalized claims are not enough to substantiate the claims. They will need to be tied to a specific government order.

To date, our firm has represented clients in front of the IRS in relation to these matters and it is important you seek the help of a qualified tax professional immediately. If you have not filed for an ERC and are unsure if you qualify, please reach out to us for a review. If you have claimed ERC funds and are unsure if your claim is valid, we can help you identify your exposure.