Navigating the Employee Retention Credit (ERC) Landscape

HOST: BROOKS: Welcome to the Cherry Bekaert Tax Beat, a conversation about tax that matters. Welcome to this edition of the Cherry Bekaert Tax Beat Podcast.

HOST: BROOKS: The Employee Retention Credit, or ERC, continues to be in the news. Today we're going to focus on the current status and what we need to know in the here and now.

HOST: BROOKS: Joining in the conversation today, as always, is MARTIN KARAMON, partner and leader of our Tax Credits and Incentives Advisory practice. Marty continues to devote a great deal of attention to ERC and leads our team of professionals helping clients file and defend these claims.

HOST: BROOKS: How are you doing today, Marty?

MARTIN KARAMON: I'm doing pretty well. We have a lot to talk about today, so thanks for having me.

HOST: BROOKS: As always, joining me, partner in crime, Ms. Sarah McGregor from Greenville, South Carolina. Ms. McGregor, how's life treating you?

SARAH MCGREGOR: Life is good. After two hurricanes, my power is back on and there was no damage, so I'm doing quite well. Thank you.

HOST: BROOKS: All right. Glad you have power. Always a good thing to have. Let's move on with a little background.

HOST: BROOKS: The IRS has taken a number of steps to address the millions of ERC claims filed, both legitimate claims and dubious claims, and that has created a lot of controversy and confusion. The first step was to stop processing new claims until sometime in 2024, then to offer a path for employers to reconsider the claims they had filed.

HOST: BROOKS: They didn't have a lot to say about legitimate claims, however. The IRS continues to scrutinize and deny claims they have in hand that are not subject to the moratorium. Earlier in September, the IRS posted more information on its website regarding appealing a denied claim, a seemingly very confusing situation for those who have filed refund claims.

HOST: BROOKS: To me, the theme is they only seem to be addressing bad players and not the legitimate claims filed by legitimate taxpayers. Marty, let's set the table with a quick rundown of the ERC, and then we can move on to the latest updates.

MARTIN KARAMON: Absolutely. To level set, the Employee Retention Credit was originally enacted in March 2020. Ultimately, through a number of legislative vehicles, there came to be four separate Employee Retention Credits: one specific to 2020 that covered three quarters, and three more—one for each of the first three quarters of 2021.

MARTIN KARAMON: The maximum refund you could get was as high as $26,000 per employee. The deadline to file for the 2020 ERC was April 15, 2024. The deadline to file for the 2021 ERCs is April 15, 2025.

MARTIN KARAMON: To qualify, you must show that your organization with employees suffered harm due to COVID. You can demonstrate this mathematically through a reduction in gross receipts: a 50% decline in any quarter of 2020 compared to the same quarter in 2019, or a more than 20% decline in any of the first three quarters of 2021 compared to the same quarter in 2019.

MARTIN KARAMON: Alternatively, if you did not have qualifying gross receipts declines, you could show that a government order limiting commerce, travel, or group meetings that was COVID-specific in 2020 or 2021 caused a partial disruption or partial shutdown of your business. Therein lies the problem: many companies claimed they had a partial shutdown without adequate documentation or were led to believe they had a partial shutdown, potentially by unscrupulous players.

MARTIN KARAMON: When a taxpayer files for an ERC, there is often no indication whether they are filing under the gross receipts method or the partial shutdown method, so the IRS has had difficulty analyzing these claims. Over time they have taken their time to get through these, which we'll talk about, but that's the basic level set for where we are with ERC.

HOST: BROOKS: So Marty, the IRS placed a moratorium on processing ERC claims in 2023. They said they were not going to process any claims filed on or after a certain date and would work on older claims. It seemed like they sat on things, but I'm guessing they were working behind the scenes. That changed this summer or late summer and early September, where the IRS began processing some older and some newer claims and working through the backlog. What are you hearing today?

MARTIN KARAMON: That's a pretty accurate summary. To be specific, on September 14, 2023, the IRS put a moratorium in place on processing anything filed on or after that date. They indicated they would continue to process things filed before that time but radically slowed down processing.

MARTIN KARAMON: In mid-August 2024 they lifted that moratorium and invested in a back-office electronic scan of what was filed. They made some algorithmic assumptions about which claims might be good or bad and started to process claims. At the same time, they issued a number of denials and paid some claims.

MARTIN KARAMON: The IRS indicated they would process up to 50,000 claims in that first month. I'm seeing claims paid and also denials, and taxpayers are responding.

HOST: BROOKS: When you talk about responding to denied claims, there seemed to be confusion about when and how to respond to notices where the IRS said your claim is denied and asked for information or didn't. How did your clients respond to that?

MARTIN KARAMON: There was confusion because the IRS initially gave no clear indication about what to do when they made the first denials. They later said you had 30 days to respond, which generated pushback because that came after taxpayers had already waited a long time.

MARTIN KARAMON: In mid-September, that response window was changed to two years. Taxpayers now have two years to respond to a denial from the IRS of a claim for an ERC payment.

MARTIN KARAMON: The IRS is allowing taxpayers to respond by providing an explanation of why they qualified, what the business does, backup of the credit calculations, and evidence that there was no overlap or double benefit taken with PPP and ERC. Much of this information was included in our deliverables for clients when we prepared ERC claims, and where clients received denials, we were able to submit that information back to the IRS.

MARTIN KARAMON: Submitting this information allows the IRS to assess whether to push the case to appeals or request more facts. Taxpayers also have the option to file in district court within the two-year period. So there are two tracks to consider: the appeals process and the ability to litigate, both measured from the same starting date.

HOST: BROOKS: We have a second ERC Voluntary Disclosure Program. It opened August 15. How does that correspond and interrelate with the other programs we've been talking about?

MARTIN KARAMON: Toward the end of 2023, the IRS put a voluntary disclosure program in place that allowed taxpayers to return amounts paid by the IRS if they assessed they did not qualify. That program allowed taxpayers to repay the IRS while keeping 20% of the amount paid to them, plus any interest paid.

MARTIN KARAMON: That initial program ended in March 2024. The IRS opened a new voluntary disclosure program that started August 15, 2024, and reduced the amount taxpayers could keep from 20% to 15%. Taxpayers can return the funds and retain 15% of what was paid to them. That program ends November 22, 2024, so time is of the essence for taxpayers making that final assessment.

HOST: BROOKS: If an employer has already received a notice of denial from the IRS regarding their claim, are they eligible for this voluntary disclosure program?

MARTIN KARAMON: No. If you have already received a notice of denial, you are not eligible for the voluntary disclosure program. That would effectively become an involuntary disclosure. The VDP is only for taxpayers making a voluntary determination on their own with no indication from the IRS. If a taxpayer is under examination by the IRS, they do not qualify for the VDP and must respond through the normal examination process.

HOST: BROOKS: Where can an employer find more information about the voluntary disclosure program?

MARTIN KARAMON: The IRS website has a robust description of the program. If you search "IRS voluntary disclosure program" and include "15%," you'll be brought to the relevant webpage. It explains how to prepare an application for the Voluntary Disclosure Program, including Form 15434, and details what must be included in the claim.

MARTIN KARAMON: We are also available to walk clients through the process. We've worked with companies that did not engage our firm to file originally but did work with us to return funds after their auditors assessed whether they truly qualified. The IRS site is clear, but we are happy to assist. The VDP deadline is 11:59 p.m. local time on November 22, 2024.

HOST: BROOKS: Not the form 142345, not to be confused with the 56789 version B form, and not to be confused with your TPS report either. Let's talk about the IRS's "dirty dozen" indicators of an incorrect ERC claim. What do you have to say about those?

MARTIN KARAMON: The IRS has published indicators on its website that point to potentially bad claims, and many of them are reasonable. They look for things like overlap with PPP, meaning taking ERC for wages funded by PPP, which would be an overclaim.

MARTIN KARAMON: They're also scrutinizing claims from large employers—those with more than 100 employees in 2019 for the 2020 ERC and more than 500 employees in 2019 for the 2021 ERC—where wages are claimed for employees paid but not working. A common issue from ERC mills is including PTO as time not worked, which under IRS guidance generally does not qualify.

MARTIN KARAMON: The IRS is also looking for claims made under the government order test without support tying the order to the business and explaining how it caused a partial shutdown. They're scrutinizing essential businesses that claim mandates affected their operations, because those businesses may have a tougher time showing the mandates actually had an effect.

HOST: BROOKS: When an employer comes to you where you did not work on the original claim, are those the kinds of initial questions you ask to assess the claim's quality?

MARTIN KARAMON: Exactly. Nine times out of ten, there's very little support connecting the government orders to the business and demonstrating how those orders caused a partial shutdown. It's not enough to say there were orders; you must connect the orders to the business's operations and show how finances and operations were affected. Being prepared to respond to the IRS's likely questions will help.

HOST: BROOKS: You've also been working with professional employer organizations, or PEOs, which file claims on behalf of multiple employers. That must create a different level of challenge.

MARTIN KARAMON: It does. Taxpayers who work with PEOs are often frustrated because they do not have a direct relationship with the IRS for payroll tax purposes. PEOs file batch claims for multiple clients, and the IRS has taken a long time to get to those large batch claims.

MARTIN KARAMON: Recently, the IRS issued a supplemental claim process, which also ends November 22, 2024, that allows PEOs to pull certain taxpayers out of a claim without revoking the entire claim. This helps legitimate taxpayers because the PEO can keep the original filing intact while removing specific employers from the claim as needed.

HOST: BROOKS: Marty, a simple question: I filed my claim nine months ago. When am I going to get my money?

MARTIN KARAMON: If you filed your claim nine months ago, that would be after January 31, 2024, and you are subject to the moratorium. I cannot tell you specifically when you'll get paid, but the IRS is working through claims filed prior to January 31, 2024, and will develop procedures for those filed after. If you have a legitimate claim, you likely will ultimately get paid, but I would not expect it this year.

HOST: BROOKS: I filed my claim 12 months ago. When am I going to get my money?

MARTIN KARAMON: There's a good chance you'll get it before the end of the year. I am seeing the IRS process claims filed in June and May 2023 and move forward from there, and a lot are getting paid right now.

HOST: BROOKS: Sarah, did you have one more question?

SARAH MCGREGOR: I was going to say employers were on the verge of filing lawsuits in district court to force refund claims, so the IRS moving and issuing checks is encouraging. I think that may have precluded a few of those lawsuits.

MARTIN KARAMON: Yes, I have seen more of those lawsuits and some of the movement has likely reduced immediate litigation pressure.

HOST: BROOKS: Final comments, Marty?

MARTIN KARAMON: Take a final look. If you didn't claim the Employee Retention Credit and you think you have a legitimate claim, don't be afraid to file. You are entitled to it as much as anyone who filed two years ago.

MARTIN KARAMON: If you have questions, please reach out to me or anyone at Cherry Bekaert. It will be directed to my team and we will walk you through options from voluntary disclosure to filing a new claim, preparing for a potential examination, and assessing your documentation.

SARAH MCGREGOR: Remain patient if you've already filed, but be proactive. Those who respond quickly to denial notices will get looked at first. Waiting two years to respond to a denial will put you at the back of the line. Be ready to respond to information requests to help move the process along.

HOST: BROOKS: I continue to be amazed at how the IRS is attempting to administratively nullify a legitimately passed law of Congress. The IRS is not authorized to administratively repeal a tax law, and it's good to see refunds beginning to be issued. I'm also glad to see members of Congress on both sides of the aisle making similar points.

HOST: BROOKS: Keep filing, be ready, and talk to Mr. Caramon. Let's wrap up the discussion.

HOST: BROOKS: That's the end of today's update on ERC. Quick disclaimer: we are not providing tax advice on this podcast. Please consult with your tax advisor, hopefully at Cherry Bekaert, for your specific tax issues or to discuss information from today's podcast.

HOST: BROOKS: Check out the firm's website at cbh.com for the latest guidance and materials on this and other tax and business topics. Please like, share, and subscribe.

HOST: BROOKS: Thank you, Marty, and thank you to our listeners for spending your time with us. Let's call it a day and go forth in peace.