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Article by Kevin Sweeney on “There’s Still Time for Businesses to Claim Employee Retention Credits but They Must Be Vigilant”
Reprinted with permission from the June 1, 2023, edition of The Legal Intelligencer © 2023 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com.
There’s Still Time for Businesses to Claim Employee Retention Credits But They Must Be Vigilant
By: Kevin F. Sweeney
Pursuant to the CARES Act of 2020, Congress authorized a powerful tax incentive for businesses called the Employee Retention Credit (ERC). The purpose of this refundable tax credit was to reward small and medium sized businesses for retaining employees through the pandemic.
To qualify, businesses generally had to, among other items, establish that they: (a) had a significant decline in gross receipts for a particular quarter; or (b) had business operations fully or partially suspended due to a COVID-related governmental order. If eligible, businesses could receive up to 50 percent of each employee’s qualified wages up to $5,000 for 2020 and up to 70 percent of each employee’s qualified wages for the first three quarters of 2021 up to $21,000. In total, they could generally receive up to $26,000 per employee.
Given the financial benefits of these incentives, which can be measured in millions of dollars for companies with significant payroll, many businesses have already claimed the ERC. While most of these claims are legitimate, the Internal Revenue Service (IRS) has recently expressed concern about some businesses improperly or fraudulently claiming credits for which they are not eligible. For example, in IRS press releases IR-2022-183 and IR-2023-40, the IRS warned businesses about using third-party ERC advisers who take improper positions related to taxpayer eligibility and credit computations. Additionally, it highlighted fraudulent ERC promotions in its 2023 “Dirty Dozen” list and noted its plan to increase enforcement in this area. To this end, it has also been reported that the IRS is currently training 300 revenue and special agents to civilly examine and criminally investigate ERC claims and that federal grand juries have already returned over ten criminal indictments, with many more likely to come.
Given the value of these credits, one would think that just about every business has considered claiming ERCs. In reality, many are still not even aware that these credits are available. The good news is that, although ERCs only apply to the 2020 and 2021 tax years, it is not too late. Businesses that have not yet claimed ERCs still have until April 15, 2024 to claim these credits for 2020 and until April 15, 2025 for 2021.
Although it is important for business owners to ensure that ERC money is not left on the table, it is equally important to recognize that the increasing IRS scrutiny in this area may leave those who claim the ERC at a heightened risk of civil audit and, in cases where an overly aggressive position is taken, criminal investigation. Given the risk and rewards at stake, it would behoove businesses and the attorneys that advise them to take appropriate precautions concerning ERC claims.
Prior to filing an ERC claim, businesses and their attorneys should consider consulting with a tax professional with knowledge of the relevant statutes and IRS guidance to assess eligibility issues and to assist in the calculation of their potential credit. This review should pay particular attention to typical areas of confusion such as the affiliation, aggregation, and full-time employee calculation rules (which are similar to, but not the same as, those applicable to Paycheck Protection Program (PPP) loan eligibility), and the partial suspension requirement, which is a subjective standard open to reasonable interpretation. Where necessary and appropriate, a formal legal opinion can be issued, which the business can rely on if challenged by the IRS.
If an ERC claim has already been filed, given the scrutiny in this area, businesses and their attorneys may want to consider requesting a second, privileged opinion from a tax attorney to assess the propriety of filed claims and to identify potential audit risks. If the business is determined to be ineligible, these professionals can advise concerning the possibility of filing amended returns to remove the ERC and, in egregious cases, with assessing whether the business, its owners, and certain employees should enter the IRS Voluntary Disclosure Program to extinguish potential criminal exposure. On the other hand, if the ERC claims are determined to be defensible, they can help the business to identify and organize all relevant documentation so that it is ready if and when the IRS ever comes knocking.
The ERC is a valuable tax credit that many businesses have already benefitted from. Those that haven’t considered claiming the ERC can still do so but should proceed in a careful and reasoned manner. By assembling the proper team and conducting a detailed analysis of the relevant issues, businesses can claim ERCs in a manner likely to survive IRS scrutiny and the coming wave of tax enforcement in this fast evolving area.
Kevin F. Sweeney is a former federal tax prosecutor. He is currently a Shareholder in the Philadelphia Office of Chamberlain Hrdlicka, where he focuses on IRS audits, civil and criminal tax litigation, white-collar criminal defense, and corporate investigations. He may be reached at (610) 772-2327 or by email at ksweeney@chamberlainlaw.com.