IRS Issues Additional FAQ’s on the Employee Retention Credit

BACKGROUND

The Employee Retention Credit (ERC), also called the Employee Retention Tax Credit (ERTC), was enacted during the COVID-19 pandemic, and subsequently amended three times by Congress. When properly claimed, the ERC is a refundable tax credit designed to assist employers that continued paying employees during the pandemic.

SUMMARY OF FREQUENTLY ASKED QUESTIONS

Throughout the FAQs, the IRS addresses which employers are eligible, rebukes claims made by marketers and promoters of the ERC and provides warning signs for possible scams.

Eligibility

To be eligible employers must have:

• Sustained a full or partial suspension of operations due to an order from a governmental authority of any level limiting commerce, travel, or meetings because of COVID-19 during 2020 or the first three quarters of 2021 or
• Experienced a significant decline in gross receipts during 2020 or the first three quarters of 2021. This test is met by comparing quarterly receipts to the same calendar quarter of 2019. The quarterly decline is more than 50% for 2020 and more than 20% for 2021.
• Qualified as a recovery startup business for the last two quarters of 2021.

If employees were able to telework or you either voluntarily closed your business or reduced hours, your business wasn’t suspended.

The IRS does provide a narrow, limited exception if an employer wasn’t suspended but a supplier was.  This exception applies only when an employer absolutely could not operate without the supplier’s products and the supplier was fully or partially suspended themselves. In addition, you will need to show that you could not obtain the supplier’s goods/materials elsewhere (regardless of cost) and it caused a full or partial suspension of your operations.

ERC scams and false claims by marketers and promoters.

The following are some of the warning signs of aggressive ERC marketing mentioned in the FAQs:

• Unsolicited calls or advertisements mentioning an easy and/or short application process.
• Statements that the ERC can be determined in minutes.
• Large upfront fees. The promoters’ fees are generally based on a percentage of the ERC refund amount.
• Refusal to sign the ERC returns.
• Claims that the employer qualifies before having any discussion of the employer’s circumstances.
• Lying about eligibility requirements, including refusing to provide detailed supporting documents.
• Eligibility can be claimed if supply chain issues of any magnitude were encountered.

The IRS recommends employers take the following steps to protect themselves:

• Work with your tax advisor or a trusted tax professional.
• Request and review a detailed worksheet and computations used to determine the ERC.
• If eligibility is based on a government order, request a copy of the specific order, and review it for applicability.
• Keep detailed records relating to your eligibility, payroll, and computations.

The deadline to claim the ERC is April 15, 2024, for 2020 and April 15, 2025 for 2021.