Are You Helping Clients Avoid a Trillion-Dollar ERC Tax Scheme?


As a financial consultant or adviser, you’ve likely received calls from excited clients urging you to help them apply for the Employee Retention Credit. Or worse, perhaps they called you to mention they’ve already applied through an outside organization you’ve never heard of. Over the past year, we’ve seen a growing number of credit mills employ aggressive tactics with business owners—in some cases, claiming they can help an owner receive more than $25,000 per employee through the ERC program.

The ERC, a component of the CARES Act, can greatly benefit qualifying companies, which are only those that continued to meet payroll obligations despite experiencing a shutdown or significant financial loss due to the Covid-19 pandemic. The problem is that the vast amount of money available through the ERC, combined with qualification criteria that some might consider open to interpretation, has led many credit mills to inaccurately convince unknowing business owners that they qualify. Fraud related to the program is estimated to be in the trillions of dollars.

Receiving a credit for which a business isn’t eligible, something the owner may not realize until an audit several years down the road, can cause a domino effect that not only impacts their company but also your relationship with that client.

If you can support a client’s application with proper documentation and a thorough review of eligibility, consider doing so; the ERC can offer a vital lifeline amid difficult economic circumstances. The next best step is pointing your client in the direction of a qualified firm to support them.

Does a Business Qualify?

Many people might claim there’s a gray area regarding qualification. Our firm believes the fundamental question is: “Does your situation satisfy the intent of the law?” Qualifying criteria for businesses include showing a decline in quarterly gross receipts that meets a defined threshold and experiencing a complete or partial shutdown due to a documented government order.

The partial shutdown concept is what credit mills are trying to exploit, and business owners who have suffered through the pandemic can be easy prey when told that they qualify for free money. Our advice is that a partial shutdown claim must be supported by three key factors:

  • A formal government order, generally issued at the state, county, or local level. Governmental “guidance” does not qualify, nor does media coverage or foreign rulings.
  • A portion of the business must be suspended, not just disrupted. For example, a law firm that switched from in-person to remote meetings was merely disrupted, not suspended, and would not qualify.
  • Evidence that the business was more than nominally impacted by the referenced government order. The IRS defines this as greater than 10% overall impact on either revenue or hours compared to the same period in 2019, but other interpretations could apply.

Some credit shops aren’t conveying key information about qualifying criteria when they encourage businesses to apply. We’ve seen one shop erroneously claim that Occupational Safety and Health Administration guidelines issued during the pandemic qualify a business when those particular guidelines fell short of a government order. Our firm doesn’t believe the IRS will see so much gray; we provide documentation in black-and-white terms. Check with your clients to ensure they understand the criteria, and don’t turn an ERC application into a potentially costly headache.

Some important aspects of the application process include:

  • PPP work papers by person need to be accounted for.
  • If the eligible employer averaged more than 100 full-time employees in 2019, then employees’ paid time off can’t be treated as qualified wages.
  • The proper 914X must be filed for each quarter—there have been many instances of older, invalid 914X forms being filed.
  • Proper financial reporting in terms of presentation and timing is critical (ASC 958-605 and IAS 20).

Understanding the Identity of a Business

Beyond the considerations related to a single business qualifying, a more complex problem emerges for anyone who owns multiple businesses; it can be particularly thorny for private equity- and venture capital-owned entities. In these instances, the owners should first identify the entities that must be aggregated and considered as one employer control group. Each control group must demonstrate overall eligibility for the ERC in aggregated terms, regardless of how individual companies within that organization might have fared.

But many ERC applications are being submitted for a single entity without conducting the due diligence to determine if overall group qualification has been achieved. Our firm starts every eligibility conversation with a control group questionnaire, not with heady credit amount estimates.

It’s Not Just the Application, but Also the Audit

Aggressive credit shops are motivated by charging a fee to business owners for helping with the application based on the credit amount the owner will receive. Because the ERC is technically a payroll tax refund, we’re wary of anyone who charges contingency fees in this way, rather than based on the effort involved.

The emphasis by credit mills on quickly getting an ERC application submitted means secondary consideration is given to legitimacy, accuracy, and the potential that the business will get audited. As consultants, it’s important to convey to clients that there’s plenty of time to approach this process carefully and comprehensively. The deadline to apply for 2020 isn’t until April 2024, and business owners have until April 2025 to submit applications pertaining to 2021.

From an auditing standpoint, while IRS operations are backlogged (some business owners might not receive their ERC until at least nine months after applying), the service is beefing up staff to focus on Covid-19-related fraud. Additionally, when receiving an ERC, a business owner must pay tax on it. If a future audit determines that the ERC never should have been provided, not only does the business owner stand to lose that money and be subject to fraud penalties, but also will have to try to recoup the tax paid on it. More complications could arise if the statute to amend the tax return in question has already expired.

Make Sure You and Your Clients Are Aware of Red Flags

While many qualified and experienced firms and professionals want to help businesses tap into the ERC, there are many aggressive credit shops that seek to take advantage by charging hefty fees to “help” businesses apply, then leaving them to substantiate the applications come audit time.

Accordingly, owners should be wary of the following red flags:

  • Inbound calls from unknown credit mills claiming they can help them save time and money with an ERC application.
  • Sketchy websites that have popped up, flashing messages such as “SAVE $26,000 PER EMPLOYEE.”
  • Advertising geared toward a specific state, considering the ERC is a federal program—e.g., “Utah businesses can tap into the ERC program.”
  • Sweeping claims about eligibility—e.g., “all beauty salons qualify”—as businesses must qualify on their own merit.
  • Any contact made by a salesperson rather than a CPA.

Bringing It All Together

The complexity and potential risks of the ERC program mean that it’s fundamental to work with a reputable consulting or accounting firm. As practitioners, we should look out for our valued clients so they don’t fall into any traps—for the sake of them, their businesses, and our relationships with them.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Jenn McCabe is a partner in Armanino’s Business Outsourcing Services practice, with more than 25 years of outsourced accounting and finance experience, including expertise in startups and the advertising and creative production industries. She helps small and mid-market companies use the latest accounting technology to maximize their efficiency, productivity, and success.

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Read More: Are You Helping Clients Avoid a Trillion-Dollar ERC Tax Scheme?

2022-10-31 01:47:30

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