In today’s climate, the Employee Retention Credit (ERC), a refundable tax credit from the Internal Revenue Service (IRS), stands as a valuable resource for businesses and a financial lifeline for many. However, the ERC has become a subject of persistent scrutiny due to the prevalence of fraudulent claims and service providers that use aggressive and predatory tactics (so-called “ERC mills”).

On September 14, 2023, the IRS made a significant announcement, introducing a temporary moratorium, or halt, on the review of ERC claims submitted on or after that date. This moratorium will remain in effect until at least January 2024, with claims submitted before September 14, 2023, continuing to process, albeit at a slower pace. This move by the IRS aims to bolster protective measures, curtail potential abuse, and shield well-intentioned business owners from predatory ERC mills.

The ERC legislation includes complex rules on entity aggregation, PPP/ERC interaction, employee count, gross receipts declines, and whether your business was affected by governmental orders – all of which require the review of an experienced professional. Given the complex nature of the eligibility tests and exercises required, many businesses may have filed erroneous claims. The ramifications of filing an erroneous ERC claim, whether knowingly or unknowingly, can be both punitive and formidable. These consequences may include the obligation to repay the credit (potentially along with interest charges and penalties), and, in some cases, criminal liability for fraudulent tax positions.

If you think that you have worked with an ERC mill or an inexperienced advisor, you should consider having an ERC expert take a second look at your claim.

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In a recent statement on the Grow Money podcast, Sagemont Advisors’ CEO Kenneth Dettman, CPA, provided insights into the evolving landscape of ERC audits. Dettman noted that while audits are underway, they have yet to reach a massive scale. Based on what the experts at Sagemont Advisors have seen, there are several areas where unknowing taxpayers can be subject to the pitfalls of a bad advisor, or file improper claims, noted below:

• Improper reliance or overapplication of the partial suspension of operations eligibility test, such as relying on any of the following arguments to support a partial suspension of operations:
  • Restrictions or modifications solely under OSHA and CDC (more on the OSHA position here);
  • Customer shutdowns or reduced customer demand;
  • Inability to hold sales meetings in person;
  • Inventory costs increased;
  • Shift to virtual workforce with comparable operations;
  • Trade shows were canceled; or
  • Mask or vaccine mandates.
• Faulty or weak supply chain arguments without a supporting governmental order;
  • Note, for a business to claim a partial suspension due to a government order impacting their supplier, it must: (i) have had a supplier that couldn’t make deliveries of critical goods or materials due to a government order; and (ii) couldn’t procure those critical goods from an alternate source.
• Failure to accurately apply the full-time employee (FTE) count test. This is often caused by the nonapplication of the aggregation rules (requiring that certain related entities must be treated as a single employer) and incorrectly utilizing the count for the single entity versus the count for the aggregated group.
• Failure to avoid double-dipping on ERC and PPP Wages as many ERC mills either purposely or unknowingly fail to ensure that none of the employer’s PPP-covered wages are used to calculate ERC-eligible wages.
• Misapplication of large employer credits, enabling sizable corporations (i.e., over 500 FTEs in 2019) to claim credits on wages paid to employees that fall outside of the purview of not performing services;
• Relying on a revenue decline within a business segment rather the overall company (or aggregated group); and
• Other vague arguments (e.g., not tied to a specific governmental order).

Unfortunately, the ERC space has witnessed significant misuse in the above areas. Nevertheless, ERC auditors are grappling with the nuances of these newly emerging regulations, making it challenging to predict the precise parameters of enforcement.

Download Sagemont Advisors’ Practical Guide to Navigating an Employee Retention Credit Audit

Fortunately, the IRS has announced forthcoming initiatives to aid victims of unscrupulous and unqualified ERC mills through an amnesty program. This program will enable affected parties to rectify inappropriate claims or repay ERC funds they should not have received.

Whether you need a qualified advisor to confirm that your ERC claim was well-substantiated or defended against an ERC audit, the guidance of seasoned professionals, namely CPAs and tax attorneys, is essential. To that end, the team of experts at Sagemont Advisors is available to:

1. Assist you in an ongoing ERC audit;
2. Help substantiate and document your ERC eligibility in preparation for a potential audit;
3. Help you decide whether you should reverse all or a portion of your ERC claim in connection with the IRS’s newly minted amnesty program; and/or
4. Help determine whether you are eligible for additional ERC that your prior advisor failed to find.

At Sagemont Advisors, we take pride in offering comprehensive “Second Look” and Audit Defense services. Our confidence stems from our deep understanding of the tax code and ERC legislation. We encourage you to reach out to one of our advisors today to explore how we can assist you or your clients in a current or potential ERC audit or through a review of previously filed claims to ensure the eligibility analysis and ERC calculation were performed accurately.

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Sagemont Advisors distinguishes itself as a firm operated and managed by licensed, credentialed, and highly experienced tax professionals and attorneys. Our experts are deeply involved in every client engagement, from inception to filing, and beyond. With decades of practical experience in tax advisory and accounting, our professionals are integral to every aspect of our client interactions. Quality and integrity remain at the core of our approach, ensuring that our clients receive the highest standards of service.

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