ERC - Scams and Examinations

Posted on Wednesday, June 07, 2023

Many organizations have already claimed the Employee Retention Credits; however, the IRS continues to warn of scams related to the credits.

The Employee Retention Credit (ERC) is a refundable tax credit for organizations who continued paying employees while shutdown due to the pandemic or had significant declines in gross receipts from March 31, 2020 to December 31, 2021.  Eligible taxpayers can claim the credit on an original or amended employment tax return for a period within those dates.  Generally, you may correct overreported taxes on a previously filed Form 941 if you file Form 941-X within 3 years of the date Form 941 was filed or 2 years from the date you paid the tax reported on Form 941, whichever is later.

To be eligible the employer must have:

• Sustained a full or partial suspension of operations due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19 during 2020 or the first three quarters of 2021,
• Experienced a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021, or
• Qualified as a recovery startup business for the third or fourth quarters of 2021.

In October 2022, the IRS issued a news release warning employers of third parties promoting improper claims.  These third parties take improper positions when determining whether an organization is eligible for the credit and also in the calculation of the credit.  These third parties normally charge an upfront fee or a percentage of the amount of the refund.  In April 2023, the IRS listed these scams to the 2023 Dirty Dozen list.  Improperly claiming ERC could result in the employer being required to repay the credit along with penalties and interest. 

If you’ve already claimed the ERC or are planning to, make sure that your organization meets the eligibility requirements and has proper documentation to support both eligibility and the calculation.  IRS Notice 2021-20, Guidance on the Employee Retention Credit under Section 2301 of the Coronavirus Aid, Relief, and Economic Security Act, includes what documentation should be maintained by the organization claiming the credit as follows.

N. Substantiation Requirements

Question 70: What records should an eligible employer maintain to substantiate eligibility for the employee retention credit?

Answer 70: An eligible employer will adequately substantiate eligibility for the employee retention credit if the employer creates and maintains records that include the following information:

• Documentation to show how the employer determined it was an eligible employer that paid qualified wages, including: o any governmental order to suspend the employer’s business operations;
  • any records the employer relied upon to determine whether more than a nominal portion of its operations were suspended due to a governmental order or whether a governmental order had more than a nominal effect on its business operations;
  • any records the employer used to determine it had experienced a significant decline in gross receipts;
  • any records of which employees received qualified wages and in what amounts; and 101
  • in the case of a large eligible employer, work records and documentation showing that wages were paid for time an employee was not providing services.
• Documentation to show how the employer determined the amount of allocable qualified health plan expenses.
• Documentation related to the determination of whether the employer is a member of an aggregated group treated as a single employer for purposes of the employee retention credit and, if so, how the aggregation affects the determination and allocation of the credit.
• Copies of any completed Forms 7200 that the employer submitted to the IRS.
• Copies of the completed federal employment tax returns that the employer submitted to the IRS (or, for employers that use third-party payers to meet their employment tax obligations, records of information provided to the third[1]party payer regarding the employer’s entitlement to the credit claimed on the federal employment tax return).

The Notice also states that all records of employment taxes should be maintained for at least 4 years after the date the tax becomes due or is paid, whichever comes later.  These should be available for IRS review.

Organizations are beginning to receive IRS notification letters relating to the ERC which could lease to IRS examinations of the credit to determine if it was proper.  

Contributed by: Carrie Minnich, MAcct, CPA | Partner |DWD CPAs & Advisors

Posted in Mission Minded Nonprofits

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