Employee Retention Credit (“ERC”) transactions. My colleagues’ previous blog posts described how the IRS has added Employee Retention Credit transactions to its annual “Dirty Dozen” list (link). We are now seeing the IRS begin new examinations related to the ERC and, in other cases, pursue criminal indictments (link). My colleagues have also described how the IRS is focusing on tax preparers and promoters involved in improper claims of the ERC (link). In sum, the IRS is serious about improper ERC claims.
So what makes a claim improper? Depending on the circumstances, determining eligibility for the credit can be a tough task. The IRS has issued myriad guidance on the subject, and yet left many questions unresolved. With respect to IRS guidance, there are different ERC rules depending on when ERC eligible wages were paid to an employee.
From the IRS website (link):
How to Claim
Follow guidance for the period when qualified wages were paid:
After March 12, 2020, and before Jan. 1, 2021
After Dec. 31, 2020, and before July 1, 2021
After June 30, 2021, and before Oct. 1, 2021
After Sept. 30, 2021 and before Jan. 1, 2022
The IRS has also stated that “wages reported as payroll costs for PPP loan forgiveness or certain other tax credits can't be claimed for the ERC in any tax period.” This would be considered improper double dipping. To be clear, employers are able to have received both PPP loans and the ERC, but they should not use the same wage base for both claims if the PPP loan is forgiven.
But there are many issues left unclear by the IRS, including a comprehensive explanation of the contours of a partial suspension of an employer’s trade or business due to governmental orders. To be clear, the IRS, in Notice 2021-20 (link) does provide some helpful examples. But there are many questions that remain unanswered and situations that remain unclear.
Ultimately, each ERC claim will need to be evaluated on its own merits by practitioners and employers. But practitioners and employers should be prepared for the IRS to conduct its own evaluations.
If you have any questions about this article or any other federal or civil tax matter, please contact me at firstname.lastname@example.org or (214) 749-2417.