ERC Update: Tax Professional Responsibilities and IRS Examinations
Tax Professional Responsibilities
The Internal Revenue Services (IRS) recently issued two general announcements (IRS Warns of ERC Scams) warning taxpayers to be wary of third-party consultants taking improper positions related to the Employee Retention Credit (ERC). In an environment where marketing campaigns promoting ERC services are seen and heard in all forms of media, tax professionals may be pressured by their clients to file a credit claim based on the advice of an ERC services promoter. In other situations, tax professionals are informed that their clients have already filed an ERC claim prepared by an ERC services promoter.
On March 7, 2023, the IRS Office of Professional Responsibility (OPR) released Issue Number 2023-02 with guidance for tax practitioners. OPR provides four guiding principles for tax professionals to follow:
- A practitioner entering an engagement with a client who has claimed the ERC, wants to claim the ERC or asks about the possibility of filing a claim for the ERC, needs to have or gain an in-depth knowledge of the credit, including eligibility criteria and qualified wages definitions.
- The practitioner must follow Circular 230’s requirements of:
- Due diligence in providing advice, and preparing and signing income and employment tax returns, including the specific standards for credits claimed and adjustments to income taxes.
- Full disclosure to a client of their tax situation.
- Reasonable reliance on client-provided information and on any advice provided by another tax professional.
- If a practitioner has reason to believe that a client’s ERC claim is owing to the client’s reliance on erroneous or improper advice from another practitioner, tax return preparer or other third party, the practitioner should advise the client of the overstated claim and any additional tax and penalties that could apply and, if requested, competently assist the client in correcting or mitigating the problem.
- The practitioner should consider informing the client of the opportunity to file a complaint about the promoter usingForm 14242, Report Suspected Abusive Tax Promotions or Preparers.
These guiding principles apply to services related to both income and employment tax returns impacted by ERC claims. Taxpayers claiming the ERC should consider that the IRS can also review their income tax returns to determine if wage and healthcare expense deductions are properly reduced by the amount of ERC claimed.
IRS Examinations of ERC Claims
When an ERC claim is examined by the IRS, taxpayers and their tax advisors should be prepared to provide the following items to the examining agent:
- Copies of worksheets and other amounts on the Form 941-X used to compute the
- Supporting documents used to prepare the worksheets and Form 941-X.
- A list of employees who were paid wages for which the ERC was claimed, including:
- Employee name
- Date of payment
- Amount of allocated health costs
- Total gross wages
- Wages paid with the Payroll Protection Program (PPP) loans
- Wages for the ERC
- Documentation that the employer claiming the ERC was eligible to claim the ERC and the basis for that eligibility:
- Documentation that operations were fully or partially suspended due to orders from an appropriate governmental authority limiting commerce, travel or group meetings (for commercial, social, religious or other purposes) due to COVID-19. A copy of the orders must be provided.
- Documentation that the employer experienced a significant decline in gross receipts during the calendar quarter for which the ERC was claimed, including records to show gross receipts for each quarter in 2019, 2020 and 2021.
- If the business is qualifying as a recovery start-up business, documentation that the business qualifies as a recovery start-up business during the calendar quarter for which the ERC was
- If the business is a severely financially distressed employer, documentation that the business was a severely financially distressed
- Documentation of the number of full-time employees in 2019, 2020 and 2021.
- Documentation supporting the determination of the amount of qualified health plan expenses allocated to wages.
- An explanation of how the business determined if it was a member of an aggregated group.
- If the business is a member of an aggregated group, ERC calculations, copies of income tax returns, employment tax returns, Forms W-2, and all other documentation noted above for each related entity in the group.
- If the business received partial or complete forgiveness of a PPP loan, a copy of the forgiveness application disclosing the type and amount of payroll costs used for forgiveness.
The ERC is a legitimate tax credit for eligible employers. As indicated in the recent communications from IRS, there are promoters that continue to mislead taxpayers into filing claims that may not adhere to the tax law or IRS guidance. It is encouraged to engage with a tax professional to review your situation if you are unsure of your ERC qualification or if your ERC amount was improperly calculated. It is also recommended that businesses review their documents and analysis in support of their ERC claim to be ready if or when the IRS contacts them.
How Cherry Bekaert Can Help
Cherry Bekaert has an experienced team of ERC professionals who are able to assist with determining your ERC eligibility and reviewing your ERC claims.