On October 19, 2022, the Internal Revenue Service (“Service”) issued news release IR-2022-183, which was intended to warn employers using third-party promoters of Employee Retention Tax Credits (“ERTCs”). ERTCs were created by the CARES Act and were designed for businesses that continued to pay employees during the pandemic and either sustained a full or partial suspension of operations due to government orders or experienced a significant decline in gross receipts during 2020 and/or the first three quarters of 2021. A qualifying employer could receive a maximum benefit of up to $26,000 per employee. For example, an employer with 200 employees could receive up to $5,200,000 pursuant to the ERTC program. While the cutoff of the ERTC program was September 30, 2021, for most businesses, Taxpayers can still apply for these ERTCs by amending their employment tax returns.

The message from the IRS in this news release is they are concerned about third-party firms agreeing to help employers claim these ERTCs on a contingent basis, then taking overly aggressive or unsupportable positions related to the employer’s eligibility for and computation of the credit. One frequently seen example is claiming credits for all available quarters without either an applicable government order suspending business operations nor a significant drop in gross receipts. By taking all available quarters, there is concern that promoters are maximizing their contingent fee at the ultimate risk of the employer.

In the news release, the Service warns employers “to be cautious of advertised schemes and direct solicitations” especially those that “are too good to be true.” Most importantly, the Service wants to remind employers they “are always responsible for the information reported on their tax returns” and that “[i]mproperly claiming the [ERTC] could result in taxpayers being required to repay the credit along with penalties and interest.” This means relying on the help of a third-party promoter is not an excuse and could result in the repayment of ERTCs plus interest and possibly penalties. It is also expected that, given the well-cited abuse in this program, the Service will use some of its newly appropriated funds through the Inflation Reduction Act to step-up ERTC audits.

While there is concern that the ERTC program may be being abused by some third-party promoters, the program itself can be a great way for qualifying employers to recoup some of the money they expended during COVID-19. In light of the message by the IRS in the news release, Polsinelli strongly encourages all employers to make sure they are using reputable professionals when pursuing ERTCs. Polsinelli regularly assists taxpayers with all types of questions regarding the ERTC program, both in planning and in IRS audit defense.