The employee retention credit (ERC) can be a tremendous boon for eligible employers to claim substantial cash refunds for keeping their employees on the payroll during the COVID-19 pandemic. To qualify, the employer must have experienced: (1) a significant reduction in gross receipts compared to the same quarter in 2019; or (2) a partial suspension of business operations due to government orders. It is the second qualifier – the partial suspension of business operations due to a government order – that involves complex analysis and verification to ensure credits are properly claimed. It is vital for employers to retain competent counsel to ensure their interests are protected at every stage of claiming, and potentially defending, ERCs to avoid potential 20% penalties.

Many advisory firms, claiming to be specialized in this area, are irresponsibly promoting and encouraging employers to claim ERCs based upon tenuous support for eligibility. Businesses should be cautious of these firms seeking to participate in the government cash grab, as their interests are often not aligned with their clients. The IRS recently took the unusual step of warning against third party providers taking “improper positions” related to eligibility and credit computation. Given the high amount at stake, several firms are offering to help taxpayers claim the ERC in exchange for upfront contingency fees based upon the amounts claimed, often encouraging employers to take unsubstantiated positions concerning their eligibility.

But if the credits are disallowed, do these firms pay any part of the penalty and interest imposed for taking an erroneous position? And will the employer receive effective audit defense from these firms?

The IRS has begun to examine taxpayers claiming ERC eligibility, including based upon the miscalculation of the credit. An IRS examination could result in forfeiture of the credit, plus enhanced penalties and interest which the advisory firms are not responsible for. Further, the statute of limitations for the IRS to assess erroneously claimed ERCs was extended to five years allowing additional time for the IRS to discover and pursue improper claims. Employers claiming ERCs based upon a partial suspension of business operations, in particular, must be cautious and should preserve specific support for their eligibility before claiming the credits, including:

• Specific government orders resulting in the suspension of business operations
• Evidence of the resulting disruptions on their business, including the supplier’s name, location and duration of disruption if relying upon supply chain disruptions;
• Proper credit computation, including properly capping qualified wages and excluding wages used to claim PPP forgiveness; and
• Reduced income tax deductions for qualified wages used to claim the ERC.