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What Happens if ERTC Advisors are Treated as "Material Advisors?" A Lot.

By Jeffrey M. Glassman on January 25, 2024
As mentioned in an earlier article, there is bipartisan support for pending legislation that, if passed, would upend much of the existing law surrounding the Employee Retention Tax Credit (“ERTC” or “ERC”). I previously wrote about the “listed transaction” provisions of the proposed legislation (link). There are numerous other ways the IRS is taking enforcement actions surrounding the ERTC. One of those ways is the IRS’s expansion of the term “Material Advisors” to specifically include “COVID-ERTC promoters” who provide aid, assistance, or advice with respect to a “COVID-ERTC document.”

As mentioned in a previous post, and at an extremely high and general level, a “COVID-ERTC promoter” is (1) someone who assists with claiming the ERTC in exchange for a large fee based on the amount of the refund or credit; or (2) someone who derives a significant portion (the bill has specific thresholds) of their gross receipts from assistance with ERTC claims. Also, at an extremely high and general level, a “COVID-ERTC document” is any document related to any ERTC claim, including any document related to eligibility determinations for, or the calculation or determination of any amount directly related to, an ERTC claim.

Many tax professionals who advised on the ERTC will probably not be considered COVID-ERTC promoters. But for those who are considered COVID-ERTC promoters, and thus also “Material Advisors,” what does that mean?

Material Advisors are generally required to file a Form 8918, Material Advisor Disclosure Statement (link—note, this file is best opened directly through PDF software), with the IRS’s Office of Tax Shelter Analysis (“OTSA”). This form includes an identification and description of the transaction; the potential tax benefits expected to result from the transaction; any tax result protection with respect to the transaction; and disclosing other people or entities who provided material aid, assistance, or advice with respect to the transaction. The Form 8918, in ordinary circumstances, must usually be filed soon after the advisor became a Material Advisor. The proposed legislation states, however, that the form need only be filed within 90 days after the proposed legislation becomes law.

Material Advisors are separately required to prepare and maintain a list identifying each person or entity with whom the advisor acted as a Material Advisor with respect to the transaction, the amount invested by each person, and other information required by the IRS. Material Advisors are also generally required to maintain each component of the list and related records in a readily-accessible form for seven years from (1) the earlier of when the Material Advisor last advised (technically called a “tax statement”) with respect to the transaction, or (2) when the transaction was last entered into, if known. The proposed legislation states, however, that the list maintenance requirements do not start until 90 days after the proposed legislation becomes law.

There are several different penalties to which Material Advisors can be subject. These include, but are not limited to: (1) Material Advisor penalties for failure to furnish information regarding reportable transactions; (2) and failure to maintain the required list (and related records) with respect to a reportable transaction. Traditional promoter penalties, for which there is technically no statute of limitation, may also be applicable.

The penalty for a Material Advisor’s failure to furnish information on Form 8918 is generally $50,000 per failure. However, in the case of a “listed transaction”—which, as discussed in a prior article, is likely to be applicable here—the penalty is increased to the greater of $200,000 or 50% of the gross income derived by the Material Advisor with respect to their assistance with the transaction. In the case of intentional failures to furnish the required information, the penalty increases to 75%. This penalty must be assessed within three years of the due date of the Form 8918 or the date the Form 8918 is filed, whichever is later. If the form is not filed, the statute of limitations may be open indefinitely. Typical reasonable cause relief is unavailable for this penalty, but there could be other ways to defend against this penalty.

The penalty for a Material Advisor’s failure to maintain a list, as set forth above, is $10,000 per day when the advisor does not timely produce the list upon the IRS’s written request. Reasonable cause relief may be available for this penalty.

In summary, there is pending legislation that would give the government numerous tools to recoup improper ERTC refunds. Those advising on ERTC claims should evaluate whether this law may be applicable to them, retain all records, and perhaps even begin preparing the lists described above. Advisors should also be aware that the Material Advisor provisions may already apply to them, but this proposed legislation will likely specifically apply to even more people and businesses. Advisors should consult with reputable tax counsel regarding the implications and content of any submissions, as well as other legal advice, as soon as possible and certainly before any submissions are sent to the government.

Nothing in this article is to be construed as legal advice. The information contained in this article is summarized and not tailored to any particular set of facts and circumstances.

If you have any questions about this article, the Employee Retention Tax Credit, or any other federal civil or criminal tax matter, please contact me at 214-749-2417 or jglassman@meadowscollier.com.