Since the beginning of 2023, we have seen an uptick in employers wanting to reconsider whether they qualify for Employee Retention Credit dollars. These clients have been told they qualify under the partial suspension rules. Consistently, we have advised clients interested in pursuing an ERC refund to simply wait. Our thought was to see what we learn from the IRS in the form of new guidance or compliance activities.
Over the course of this year, we have seen an increase in IRS warnings of unscrupulous ERC mills as well as a recent report of 252 ongoing criminal investigations of $2.8 billion of ERC claims.
Recently, they issued a Generic Legal Advice Memorandum (GLAM) specifically outlining their legal stance on the supply chain disruption argument that is widely used to support an ERC claim.
On September 14, 2023, IRS issued a moratorium on new ERC claims for the remainder of 2023. The IRS expects claims on file as of that time to take 180 days to process due to a more stringent review process.
IRS is also working on processes to withdraw claims and give relief to employers who wish to refund a claim that was determined to be improper.
Auditors are very interested in seeing the terms of the engagement letter for ERC services provided, and specifically, the fee structure or billing practice.
Additionally, we are starting to see audits of larger ERC claims. IRS auditors are well-trained and very thorough. Many claims filed by CPAs were based on Gro, a decline in in gross receipts. For these claims, expect the auditor to reconcile wages to quarterly payroll filings and reconcile quarterly revenues to income tax returns filed. Auditors will review the PPP loan forgiveness application closely to ensure the wages were not claimed for both ERC and PPP. They are also very interested in seeing the terms of the engagement letter for ERC services provided, and specifically, the fee structure or billing practice.
For claims that were based on a full or partial suspension of operations due to a government order, the audit process will be more intensive. Documentation of eligibility will be key, and employers must be able to quantify the impact tied to specific government orders.
It is important to review recent developments with clients who did receive ERC dollars. If they engaged another firm to provide these services, it may be prudent to review the claim against recent IRS guidance and compliance activity.
If in fact an ERC mill is indicted, look for the IRS to identify all employers who engaged that firm to assist them with ERC.
We expect more guidance and likely some criminal indictments by year-end. If in fact an ERC mill is indicted, look for the IRS to identify all employers who engaged that firm to assist them with ERC.
Lastly, if a client submitted a claim in 2023, expect the claim to be subject to a desk review at a minimum.