Navigating the Employee Retention Credit (ERC) Landscape

(00:00) [Music] welcome to the Cherry Bekaert tax beat a conversation about tax that [Music] matters welcome to this edition of the Cherry Bekaert tax beat podcast the employee retention credit or ERC continues to be in the news and today we're going to focus on the current status and what we need to know in the Here and Now joining in the conversation today as always is Martin Kon partner and leader of our tax credits and incentives advisory practice uh Marty continues to devote a great deal of attention to ERC and leads our team of

(00:47) professionals helping clients file and defend these claims so how you doing today Marty I'm doing pretty well we have a lot to talk about today so thanks for having me and as always joining me partnering crime Miss Sarah McGregor from Greenville South Carolina miss m Gregor how's life treating you uh life is good um after two hurricanes uh my power is back on and uh no damages so I'm I'm doing quite well thank you all right well glad you have power always a good thing to have all right so let's move on with a little background the IRS has

(01:27) taken a number of steps to address the millions of ERC claims filed both legitimate claims and dubious claims and therein has created a lot of controversy and confusion um first step was to stop processing new claims until sometime in 2024 and next to offer a path for employers to reconsider the claims they had filed um they didn't have a lot to say about legitimate claims however so the IRS continues to scrutinize and deny claims they have in hand that are not subject to the moratorium and earlier in September IRS posted more information

(02:02) yet again on its website regarding appealing a denied clim a denied claim seemingly a very confusing situation for those who have filed uh refund claims and again to me the theme is they only seem to be addressing the bad players and not about all the legitimate claims that have been filed by legitimate taxpayers so Marty let's set the table with a quick quick rundown ERC and then we can move on to the latest updates absolutely okay so to level set the employe retention credit was originally passed way back in March of 2020 and

(02:37) ultimately through a number of legislative Vehicles there aim to be four separate employer retention credits one specific to 2020 that was taken over three quarters and three more one for each of the first three quarters of 2021 the maximum amount of refund you could get could be as high as $26,000 per employee um the time to file for 2020 employee retention credits pass April 15 2024 the time to file for the 21 erc's passes April 15 2025 um the way that you qualify for these are indicating or showing that you

(03:19) as a organization that had employees suffered a harm due to covid either you can throw that show that mathematically through a reduction in your gross receipt by either a 50% amount in any quarter of 2020 compared to that compared to that same quarter in 2019 or a more than 20% decline in any quarter of in the first any of the first three quarters of 21 compared to any of the first three quarters of 2019 um or and this became more controversial uh if you didn't have the gross receipts declines you could show

(03:53) that a government order limiting Commerce travel or group meetings that was Co specific in 2020 or 2021 CA what's known as a partial disruption or a partial shutdown of your business and therein lies the problem many companies claim they had a partial shutdown without having adequate documentation or were led to believe they had a partial shutdown potentially by some unscrupulous players out there but when they file for an ERC there is no indication whether you're filing under the grocer receipts method or under the

(04:23) partial shutdown method so the IRS really had no way to make that analysis um so what they've done over time is taken their time to get through some of these which we'll talk about but that's kind of level setting where we are with ERC so Marty uh the IRS placed a moratorium on processing uh ERC claims in 2023 uh just they said we're we're not going to process any of these new claims coming in we'll work on the old claims but it seemed like they they sort of sat and didn't do anything but I'm guessing they were working behind the scenes but

(04:55) that seems to have uh sort of transitioned here this summer or late in the uh summer early September R the RS has now begun processing some of those um older claims and some of the newer claims and working through that backlog uh what are you hearing today I think that's a pretty accurate summary but let me just sort of rephrase what you said with some dates that are specific so on September 14th 2023 the IRS placed put into place a moratorium on processing anything that was filed September 14th or later um they indicated that things filed before

(05:32) that time they would continue to process but they radically slowed down the time by which they were processing these in mid August of 2024 they lifted that moratorium and um they also made some amount of investment into doing some kind of uh back office uh we'll call it like electronic scan of what was filed and they made some algorithmic assumptions shall we say about what claim that were maybe good and bad um and started to process these claims and then at that same time came through a number of denials and some process some

(06:09) claims actually started to be processed and and paid at that time too but we saw a number of denials come through um and so that's kind of where we are right now we're seeing them start to get through them they indicated that they would process up to like 50,000 in that first month I am seeing claims paid I seeing the IRS also uh indicate that certain claims they have questions about or deny and taxpayers are responding so when you talk about responding to those claims that were denied there seemed to be some confusion

(06:38) about uh when and how to respond to those notices where the IRS said your your claim is denied send us some information or don't send us some information uh what how how did your clients respond to that well there was only confusion due to the fact that the IRS gave no indication whatsoever in terms of what to do when they made their first denials so everybody was confused there was no um they meant to say that you had 30 days to respond back to the IRS but they didn't do that and then two weeks later they then came out with a

(07:08) blanket statement that you did have 30 days to to make to make a response back to the service um that got quite a bit of push back shall we say 30 days after waiting that long um was then in midep changed to 2 years so taxpayers now have two years to respond to a denial uh from the IRS of a claim for an employee retention credit payment um and sort of that's where we are right now what we are um what the IRS really is doing is um allowing taxpayers to respond by providing an indication of why they qualified what their business does um

(07:48) providing all the backup of the credit calculations indicating that there was no sort of overlap and double benefit taken with PPP and an ERC um and just providing all the information to the IRS that we actually provided to the client when we were doing an employer retention credit um claim so much of what we had in our deliverables for our clients to the extent and only a few really did get denials we had that information on hand we were able to submit that back to the service at the same time um this is the

(08:17) process for um sending it back to the service so they can make an assessment of whether or not to push it to appeals or not you can also actually um file with the district court um or with within a 2-year period as well so what a lot of our clients are doing is um providing the facts back to the IRS so that they can the IRS can make an assessment of whether to push it to appeals with a recommendation to to pay or um or to ask for more facts alternatively at the same time they're kind of waiting a little bit to see what

(08:48) comes at that time because they have two years from the same date they got the denial by the way to file with the district court and so we're we're looking at two different things one the appeals process two the ability to litigate but both with the beginning same date um of we'll call it a new Statue limitations within which they can uh make an a make a response all right I think we're kind of uh incorporating some of this but just for clarity uh we have a second ERC voluntary uh disclosure program um open it opened

(09:19) August 15th what can you tell about that and how that corresponds and Inter relates to the other stuff we've been talking about good point Brooks and I probably jumped ahead a little bit so lets go back in time so with that said um toward the end of 2023 the IRS put into place a voluntary disclosure program which was and provided the ability to taxpayers to uh make an assessment of the monies they received for ERC and make a determination whether they actually believed with all the new guidance that had come out from the

(09:49) service of whether they actually qualify for this employe retention credit they could in that case um return the amount paid by the IRS but hold on to 20% of the amount um that came to them in addition to the the interest amount that was paid to them too the reason for that was um to encourage taxpayers to give back the cash but also to make them whole for potentially paying a what they've def defined as an ERC Mill or potentially someone who misled them into qualification um they probably paid them a fee equal to roughly approximately 20%

(10:22) so this gave them a a real ability to pay back the funds without being put In Harm's Way that ended in March of 2024 for the IRS opened up a new disclosure a new voluntary disclosure uh program but they changed the amount of withholding for the taxpayer from 20% down to 15% so the taxpayer can still make an assessment of whether or not they really should have gotten these monies and keep 15% of what was paid to them and then pay back the IRS and so that's kind of where we are right now that ends November 22 so time is a bit of the

(10:55) essence in terms of taxpayers making that final assessment yeah and and if a client has already an employer has already received a notice of denial from the IRS regarding their claim they're not eligible for this um uh voluntary disclosure program is that right yes that would turn it into an involuntary disclosure program I think in that particular case but yeah that's exactly right so it's only for those taxpayers making the determination on their own um with no indication from the service to the extent they are under examination by

(11:28) the IRS they no longer qualify for that uh VDP and um they'll have to go through the process of making the response to the service in the normal course of business where can an employer go to find out some more information about this voluntary disclosure program the IRS has a pretty robust website and description of what to do to qualify for um the the VDP um it's honestly if you just do a search IRS volunteer disclosure program and put 15% in there you'll be brought to their web page and it tells you everything about um

(12:00) preparing what's known as a form 15434 which is an application for um the the voluntary disclosure program it tells you everything that has to go within the claim but also here's something else they could do we would be more than happy to walk them through the process we have worked with some companies who didn't work with us to file but did work with us to give some of the money back as um their auditor made an assessment of whether or not they actually qualified so it's pretty apparent on the IRS website but we're

(12:25) more than happy to walk any client through it and they have again until I think 11:59 p.m. local time November 22nd 2024 and not the form 142 345 not to be confused with the uh 56789 version B form right um not to be confused with your TPS report either so that's correct all right so um let's talk about I mean again there's a lot of negativity on all these uh clearly you can see the IRS slant on all this they've gone out and know I'll say you know they've come in the last uh come to the IRS in the last few years of

(13:07) putting their dirty dozen tax fraud scamps and everything so now they have their dirty dozen 12 indicators of an incorrect ERC claim that they're kind of uh uh throwing into that same bucket so what do you have to say about those yeah I I think they've actually had some decent indicators on their um on their website indicating what might show a bad claim and a lot of it has to do with whether or not you were you paid somebody on a contingent basis or whether or not they would make the assessment within like two to three

(13:40) minutes of an automatic qualification what they most recently did though was add some uh areas that they have seen um that would indicate that these are bad claims and I kind of agree with some of them right now they're looking for things like in the calculation you have an overlap with PPP meaning you're taking a benefit for ERC on a wage funded by PPP clearly that's something that should be clearly indicated in the work papers um that would be an overclaim another thing is they're looking at large employers those that

(14:08) had more than 100 employees in 2019 or 500 employees in 2019 for respectively the 2020 and 2021 erc's where um they're claiming wages for more employee generally you're only for those large employers a lot of claim wages for people who were paid not to work what I've seen is a lot of the ERC Mills include PTO PA to these employees as time not worked which under the IRS guidance does not qualify so they're looking for that they're also looking for um those that have made ERC claims under the call it government order test

(14:43) where they have no support of what the government mandates are and they're also looking at essential businesses that made this qualification that would have a tougher time to say that the mandates actually had an effect on them uh so using that as a guide uh is that when a employer comes to you where you did not work on the original claim those are the kinds of questions the easy easy questions to handle first to to uh consider the the quality of the uh claim that was filed by this employer uh before you got to look at it that that's

(15:19) exactly right although nine times out of 10 what I find is that they honestly have very little support in terms of like why the business was actually affected by actual government orders it's tying the orders to the business and how a cost a partial shutdown as opposed to saying there were orders out there um and then yet you see the finances of the business still improving and so you really need to tell that story and connect the dots there um but those points we just went through our areas where the IRS U you you'll expect

(15:49) them to make question to ask questions around that and so being being prepared to respond to those uh will certainly certainly help in those situations you you've also been working with some um um professional employer organizations which uh help to file claims on behalf of or in connection with multiple employers that they support um that's got to bring a different level of challenge a different level of Challenge and clearly a lot more frustration on behalf of taxpayers who work especially with a a thirdparty payer peo right um

(16:24) because that client then does not have a direct relationship with the IRS for payroll tax purposes they have to go through their peo and those peos are filing batch claims for multiple clients at one time thankfully recently the IRS just a few weeks ago came out with another supplemental claim process that also ends on November 22nd 2024 that allows peos to without re revoking an entire claim it allows them to pull certain taxpayers out of the claim and keep the claim essentially filed at the original time and so so this will be

(17:01) something that I think is welcomed by any taxpayer who has a legitimate claim through a peo um because the Poo won't have to like stop and refile or anything like that it will keep things going because clearly taxpayers working with peos and third party payers the ones who are most frustrated because the IRS has taken a long time to get to these large batch claims Marty sorry I was going to say Marty I I I just have I mean I a simple question I follow my claim nine months ago when am I going to get my money if you filed your claim 9 months

(17:37) ago um that would be after January 31st of 2024 so you are again on a moratorium so I cannot tell you that specifically but I know that the IRS is going to work through all the claims filed prior to January 3 31st 2024 and then come up with new procedures um for those filed after it's it's not to say that um you won't ultimately get paid if you have a legitimate claim but I wouldn't expect it anytime this year all right when am I I found my claim 12 months ago when am I gonna get my money there's a good chance that you

(18:13) will get it before the end of the year and the reason I say that is because I am seeing them I'm seeing the IRS indicate that they are looking at claims filed in June and may of 2023 and moving forward from there and so um I see I see I see a lot getting paid right now okay good just wanted to really cut to the chase right there Sarah do you have one more question I I was going to say that you mentioned uh employers being frustrated um I I think some employers were were on the verge of and may have gone ahead to to file some lawsuits with

(18:48) the district court to force those um refund claims action on it so uh this here in the IRS is moving and now issuing actual checks to clients is is Inc enaging I think they're jumping ahead a few ahead of a few of those lawsuits that that have come their way and so I was starting to see more of that yeah all right let's move on the final comments uh any final words of uh wisdom Marty I don't know how wise it is but I would just say this take a final look if you didn't claim the employee retention credit don't be afraid of it if you

(19:22) think you have a legitimate claim I think it's something you should look at filing because you are entitled to it as much as anyone who filed it two years ago um beyond that though if you have any questions please reach out to myself or anyone else at Cherry Bekaert it'll get directed toward my team and we will be more than happy to walk you through exactly what makes sense from voluntary disclosure to filing a new claim to maybe getting ready for a potential examination and just making an assessment of what documentation you

(19:49) have Sarah uh I was going to say that just just remaining uh patient number one if you've already filed uh but also being on the front side so that um those that respond quickly to those denial claims are going to get looked at first SO waiting two years to file your denial uh a response to your uh claim being denied is is going to put you at the back of the line again so uh trying to be ready to respond to questions or issues or information requests uh is going to be helpful to move this process along excellent point um I'm going to go

(20:28) with uh a recast of something I've said a couple times I continue to be amazed at how the IRS is trying to inrun a legitimately passed federal law of Congress and they do not have the ability to try to administratively repal an a tax law and so they've been trying to do it and trying to do it and I'm um and I'm you know I'm glad to see some of this money starting to be refunded but the other thing is I'm also glad to start seeing uh some of our congressmen on both sides of the aisle starting to make comments along these

(21:06) same lines that the IRS is not authorized to say we're just not going to refund money to people that they're entitled to because we don't like the fact that some people uh aren't entitled to in file B bad claims so all right so keep it going keep it filing be ready and talk to Mr caramon all right let's wrap up the discussion uh uh that's the end to today's update on ERC thank you for listening in quick disclaimer that we are not providing T tax advice on this podcast please consult with your Tax Advisor hopefully

(21:42) at Cherry Bekaert with your specific tax issues or to discuss information from today's podcast check out the firm's website at cbh.com for the latest guidance and materials on this and other tax and business topics uh that's the conclusion please like share and subscribe thank you Marty thank you our listeners for spending your time with us we truly appreciate it let's call it a day and go forth in peace [Music