Volume 23.01
On March 7, 2023, the IRS issued a warning to Employee Retention Credit claims. False claims generate compliance risk for people and businesses claiming improper credits. According to the warning, “The IRS and tax professionals continue to see third parties aggressively promoting these ERC schemes on radio and online. These promoters charge large upfront fees or a fee that is contingent on the amount of the refund. And the promoters may not inform taxpayers that wage deductions claimed on the business’ federal income tax return must be reduced by the amount of the credit.”
Businesses should be cautious of advertised schemes and direct solicitations promising tax savings that are too good to be true. Taxpayers are always responsible for the information reported on their tax returns. Improperly claiming the ERC could result in taxpayers being required to repay the credit along with penalties and interest.
The ERC is a refundable tax credit designed for businesses, including healthcare providers, who continued paying employees while shut down due to the COVID-19 pandemic or who had significant declines in gross receipts from March 13, 2020, to December 31, 2021, compared to prior periods. Eligible taxpayers can claim the ERC on an original or amended employment tax return for a period within those dates.
To be eligible for the ERC, employers must have:
- Sustained a full or partial suspension of operations due to authority limiting commerce, travel, or group meetings due to COVID-19 during 2020 or the first three quarters of 2021, or
- Experienced a significant decline in gross receipts during 2020, or
- A decline in gross receipts during the first three quarters of 2021, or
- Qualified as a business for the third or fourth quarters of 2021.
Many healthcare providers have applied for the ERC without considering the “Aggregation Rules”. Aggregated employers are treated as a single employer for all aspects of ERC. Aggregated group rules:
- Section 52(a) – parent-sub or brother-sister controlled group, or combined group corporation rules generally based on > 50% ownership,
- Section 52(b) – similar aggregation rules to partnerships, trusts, estates, soleproprietorships operating a trade or business, and
- Section 414(m) or (o) – normally used to determine related entities for purposes of qualified retirement plans & other employee benefits.
Many healthcare providers have applied for the Employer Retention Credit under the premise that a partial suspension of operations occurred because of orders from an appropriate government authority. An employer that operates an essential business is not considered to have a full or partial suspension of operations if the governmental order allows all the employer’s operations to remain open. However, an employer that operates an essential business may be considered to have a partial suspension of operations if, under the facts and circumstances, more than a nominal portion of its business operations are suspended by a governmental order.
Recently one of our clients was subjected to an audit for the calculation of the Employee Retention Credit (not the qualifying event). During that audit, we learned a great deal regarding the denial of the credit for healthcare providers who attempted to justify the credit under the partial suspension of operations.
According to the IRS, “The aggressive marketing of the Employee Retention Credit continues preying on innocent businesses and others,” said IRS Commissioner Danny Werfel. “Aggressive promoters present wildly misleading claims about this credit. They can pocket handsome fees while leaving those claiming the credit at risk of having the claims denied or facing scenarios where they need to repay the credit.” Additionally, “This continual barrage of marketing by advertisers means many invalid claims are coming into the IRS, which also means it takes our hard-working employees longer to get to the legitimate Employee Retention Credits,” Werfel said. “The IRS understands the importance of these credits, and we appreciate the patience of businesses and tax professionals as we continue to work hard to get valid claims processed as quickly as possible while also protecting against fraud.”