For eligible companies, the Employee Retention Credit (ERC) provides vital funding needed for post-pandemic business improvements.
To help clients seize this opportunity, firms are either offering ERC assistance services themselves or partnering with ERC specialists.
Although a partnership can ease the significant workload accompanying ERC claims, it’s worth noting that not all ERC professionals are equal. Since the ERC was passed in 2020, many unscrupulous ERC professionals have submitted slipshod applications for clients with scant documentation.
Let’s bring that into perspective. Though an estimated $10.9 billion dollars of ERC was distributed in 2020 alone, the IRS reported in early 2022 that it had identified over 11,000 returns that falsely claimed $2 trillion of ERC dollars. As awareness about the ERC increases, the number of companies vying to form an ERC partnership with you will also increase. Not all of them will be working in the best interest of your clients.
It’s in your best interest to learn how to vet your ERC partners. Here’s how.
Many ‘ERC mills’, as CPA Dan Chodan refers to them, popped up overnight because of the lucrative nature of the ERC tax credit. With the help of aggressive marketing practices, these ERC mills have positioned themselves as experts, taking advantage of clients who don’t know enough to distinguish a fraudster from a professional.
When you’re researching a potential ERC firm, be wary of any ERC specialist that started in 2020, following the ERC’s enactment. Instead, look at a firm’s online reviews and peer recommendations to determine whether they will help or mislead your clients.
Amid the flurry of myths and misnomers about the ERC, unscrupulous professionals use slick words instead of reasonable guidance to convince clients that their ERC position is correct.
However, as the IRS increases its focus on taxpayer compliance, it’s critical that you choose a partner who substantiates their ERC positions for clients with thorough documentation and reasonable interpretations of available guidance.
This is particularly important when it comes to claiming the ERC for clients based on the suspended operations test, which has many gray areas that require professionals to tread carefully.
“You’ve pre-qualified to receive thousands from the ERC credit,” promises the ERC mill’s ad on TV, social media, and the radio–some of them even going as far as detailing a specific amount before reviewing any financial statements or circumstances.
In my experience, after encountering this kind of advertising, many clients are confused when you attempt to explain that they do not qualify based on either the gross receipts test or the suspended operations test. This messaging mismatch about the ERC is one of the biggest reasons why my firm has started creating content to educate people on the facts of the ERC.
While the gross receipts test for the ERC is fairly straightforward, the suspended operations test involves a lot of gray areas that require ethical, professional judgment.
When researching an ERC partner for your firm, be sure to avoid firms that promote the following misconceptions:
Many firms attempt to claim the ERC for clients because of mask policies or other minor operational adjustments. However, for an operational adjustment to make your clients potentially eligible for the ERC, it must impact over 10% of your gross receipts or over 10% of your total service hours.
Occupational Safety and Health Administration (OHSA) guidelines
Although OSHA’s advisory notices are being cited as the basis for many ERC claims, they are neither sufficient nor appropriate authority for the ERC. The COVID page of the OSHA website clearly states that OSHA guidance is informational in nature, which doesn't fulfill the government mandate requirement of IRC Section 3134.
Also, the General Duty Clause—though it’s often used to claim the ERC—is based on a law created in 1970, not in response to COVID-19 as required in IRC Section 3134.
Centers for Disease Control and Prevention (CDC) guidelines
Question 20 of IRS Notice 2021-20 distinguishes between two employers, one that temporarily closes down because of a direct government mandate and one that closes to follow CDC guidelines.
It’s worth noting that only the first is listed as potentially eligible for the ERC. The second employer is described as merely “following CDC guidelines.”
Question 12 of IRS Notice 2021-20 explains that if a business is unable to get “critical materials from its suppliers because they were required to suspend operations, the business would be considered an eligible employer.”
While many ERC mills rush to qualify their clients for the ERC based on this excerpt, it’s worth noting that ERC eligibility depends on the client’s inability to find an alternative supplier.
When claiming ERC for a client based on a supplier shutdown, choose an ERC firm partner who is diligent about documenting the client’s failed efforts to obtain an alternative supplier.
As CPA Dan Chodan noted, people don’t like talking about fake ERC mills when they’re getting a referral check. Still, it’s critical to discuss and spread awareness about unscrupulous ERC professionals so we can protect our hard-earned reputation and trust with clients. AICPA Communication Manager, Kelly Mullins, recently discussed ERC referral fees in an episode of Ethically Speaking, highlighting the following considerations:
When 941 returns are amended, you’ll need to revise and sign off on the client’s annual return. This includes indirectly approving the revenue calculations and documentation used to support the final ERC position. CPAs like myself must also be careful to maintain adherence to the Statements on Standards for Tax Services.
Opportunistic ERC mills appeared overnight and can disappear just as quickly. This means you’ll be responsible for explaining and substantiating your client’s ERC position in the event of an IRS audit. If your ERC partner did inaccurate work, you could be held liable for their errors.
Taking time to vet your ERC partner will help you avoid an embarrassing connection to an unfavorable headline. Accountants are trusted business advisors, which means our clients rely on us to provide trustworthy solutions, which extends to our recommendations and network of partners.
I hope this article has helped you learn how to find the best ERC partner, or review your existing partnerships, so you can continue ensuring the continued success of your clients and your firm.
President & CEO, MBS Accountancy
Cassidy is an active member of Intuit’s ProConnect community and CalCPA, a former member of Intuit’s Accountant Council, and a 2021 honoree of The CPA Practice Advisor's 40 under 40 award. Since 2011, Cassidy has led his accounting firm, MBS Accountancy, as it provides financial clarity for clients through insightful accounting and prudent tax planning.