ERC - Too Good to Be True?

BY RAYMOND L. BALD, CPA, CFE & RONALD H. COOPER, CPA

Over the last several months, have you been contacted by consulting firms promising you thousands in tax refunds under the Employee Retention Credit (ERC) program? I certainly have. Not a week goes by that I don’t receive at least a few such calls promising me big bucks. But is it true? Like practically all answers to tax questions, it depends.

The ERC is one of the many tax breaks rolled out by Congress to partially alleviate the negative economic effects of the Covid pandemic. It’s a refundable payroll tax credit for businesses that continued to pay employees during the Covid pandemic from March 13, 2020 to September 30, 2021. (The credit period was extended to December 31, 2021 for “recovery startup” businesses.) Depending on the period for which it is being claimed, the credit can be up to $5,000 - $7,000 per quarter for each eligible employee. The credit is reported on the applicable quarterly payroll tax return and reduces the amount of payroll taxes owed. If you already filed your payroll tax returns without claiming the credit, you can amend those returns and get the credit refunded. However, the catch is you must qualify to avail yourself of these credits. So who is eligible?

There are basically two ways to be eligible for the ERC. The first is by passing a “decline in revenue” test. Generally speaking, you qualify for the 2020 credit if your gross receipts in a quarter decreased by at least 50% when compared to the same quarter in 2019. You similarly qualify for the 2021 credit except the decrease in revenue threshold is 20% rather than 50%, and it applies only to the first three quarters of 2021. Although certain factors can complicate the decline in revenue test (e.g. having to combine multiple commonly owned businesses when applying the test), it’s basically a math exercise. The other way to qualify for the credit is a bit hazier.

According to the IRS’ ERC website, a business will also qualify for the credit if it “sustained a full or partial suspension of operations limiting commerce, travel or group meetings due to Covid and orders from an appropriate governmental authority.” As you can see, answering this question is not a straightforward math exercise. It’s actually quite subjective and therein lies the problem. There has been an explosion of firms aggressively marketing to businesses that they qualify for the ERC under this “suspension of operations” option. They further entice their potential clients using a win-win scenario wherein their fee is based on a percentage of the ERC refund. If you don’t get the refund, the consultant doesn’t get paid. What do you have to lose? In fact, you could lose a lot if you’re not careful; let me explain.

Thousands of businesses have been filing amended payroll returns to claim ERC’s. Prodded by Congress, IRS has been working diligently to process these returns and get refunds issued spending little time examining the legitimacy of these amended returns. In the meantime, businesses are receiving their refund checks and consulting firms are collecting their agreed-upon “share” of the refund. If a business is later audited and IRS determines it does not qualify for the credit, the business (not the ERC consultant) will owe the refund back along with interest and penalties. The business’ only recourse will be to sue the ERC consultant to recoup its fee and other applicable damages, assuming the firm is still in existence.

Considering the IRS’ low audit rate, you may conclude it’s worth the risk. However, keep in mind the IRS is fully aware of these aggressive ERC promotors and issued a warning to taxpayers in March 2023 about them (News Release IR-2023-40). The IRS’ warning clearly states that it is the taxpayer’s responsibility to review the ERC guidelines to ensure they qualify for the credit. Recent www.onelifemorials.com. federal budgets have also significantly increased IRS funding for more auditors, and IRS disclosed it is training examiners specifically for ERC audits. Although overall audit rates may remain relatively low, expect ERC audit rates to be much higher given the rampant abuse going on.

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Despite the higher audit risk, it’s still worth investigating whether you qualify for the ERC. However, be smart about it by “audit proofing” yourself to the extent possible. First determine whether you may qualify under the far more objective “decline in revenue” test. It is far easier to support your position using good old mathematics than relying on a spongy qualitative argument.

If you don’t meet the “decline in revenue” test but believe you may qualify under the “suspension of operations” test, build the best argument you can by clearly documenting how your business was negatively affected by a government ordered suspension of operations. Back it up by clear examples of how you may have had to limit hours of operation, how revenues from a particular service declined due to government restrictions (e.g. on-site memorial services), or if your suppliers were unable to deliver critical supplies to your business. If you do work with a thirdparty consultant, research their history and reputation. Speak to other businesses who have used their services, particularly those who may have been audited by the IRS and how supportive the consultant was during the audit.

The ERC is a potentially large credit for which you may qualify. However, like many parts of the tax code, determining if you qualify can be complicated and may require the assistance of a trained professional. Despite what many consultants are promoting, qualifying for the credit is not always a slam dunk. It’s up to you to properly vet the ERC consultant you’re working with to ensure they have your best interests in mind and that you are truly entitled to the ERC you are claiming.

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This article is meant to provide general information and should not be construed as legal or tax advice or opinion and is not a substitute advice of counsel, CPAs or other professionals.

Raymond L. Bald, CPA, CFE is a funeral home tax accountant and consultant with Cummings, Lamont & McNamee, PLLC. He can be reached by phone at 603-772-3460, or you may email him at rbald@clmcpa.com

Ronald H. Cooper, CPA is a funeral home accountant and consultant with Ronald Cooper, CPA, PLLC. He can be reached by phone at 603-671-8007, or you may email him at ron@funeralhomeaccounting.com.