There have been two significant developments over the last quarter which employers claiming the Employee Retention Tax Credit (ERTC) should take note of:
1. On August 16, 2022, the Inflation Reduction Act of 2022 became law. The Internal Revenue Service received billions of dollars in support for Enforcement, Operations Support, and more. With that, the agency will be hiring a rumored 87,000 new IRS employees who are dedicated to tax enforcement.
2. Recently, on October 19th, the IRS warned employers to beware of third parties improperly promoting Employee Retention Credit claims.
The economic benefits of ERTC are significant for qualifying employers; ensuring full compliance and being prepared to defend your claim is critical to mitigating future risk.
The IRS is now funded and focusing on COVID-related fraud
Congress’ response to the economic damage caused to employers by COVID was to establish two new government incentive programs aimed at small businesses:
- the Paycheck Protection Program (PPP), and
- the Employee Retention Tax Credit Program (ERTC).
These programs have similar goals: to encourage employers to keep employees working during periods of significant uncertainty and provide substantial economic relief to employers.
However, while PPP was overseen by the Small Business Administration and required an application, review, and approval process, the Employee Retention Tax Credit program is like our voluntary compliance tax system (employers can participate in the economics without obtaining sign-off by a governmental agency before receiving the economic benefits).
Further, the Employee Retention Credit program falls in the category of a tax incentive program – a category of tax planning that has historically only been utilized by very large employers who have either tax departments or access to sophisticated systems and tax advice that facilitate participation.
ERTC is explicitly aimed at smaller employers with limited access to both. This situation is ripe for misapplication of the law or even fraud. There have been warning signs like expensive advertising, new market participants, and expensive contingent fee arrangements, all of which can be indicative of potential problems.
Obviously, advertising, the establishment of new businesses, and contingent fee arrangements are not problematic in and of themselves. Still, significant economics with limited oversight often attracts less than qualified participants and advisors.
A Warning from the IRS
As noted above, the IRS has taken notice. The fact that the IRS is focused on this subject is not surprising, and several factors drive it:
• Significant Economics – the program is lucrative for qualified employers. In many cases, the economics are as much or more than those involved in employers’ PPP claims;
• Lack of Oversight – the program was established as voluntary compliance tax law;
• New Participants – because most qualified employers are under 500 full-time employees, this is the first time they’ve ever taken a tax credit. Because tax credits have historically been claimed mostly by large employers with expensive and sophisticated advice, these new participants are frequently at a loss for where to find experienced guidance.
• Significant Participation – The IRS expects the number of ERTC claimants to be significant and the dollars claimed to measure in the billions.
Since the passing of ERTC, it seems that the logical deployment of these resources is not towards the ongoing administration of established tax laws which have been administered for years but towards COVID-related programs like ERTC, where significant economics are at stake. Inappropriate claims have likely been filed without meaningful oversight.
Additionally, when the program was established, Congress recognized that this was a situation that could result in the misappropriation of funds. In the law, the IRS is granted five years to audit claims¹, a full two years longer than the normal statute of limitations. It seems incredibly unlikely that this will not be a point of focus for these 87,000 new agents.
Our point is not to scare a qualified employer from participating in a program that can provide significant economics but to encourage employers to make informed choices when choosing a service provider. Audits and/or inquiries from the IRS are simply in the ordinary course of tax enforcement and should be expected.
How to Protect Your Business
To best position your business to successfully answer a future challenge by the IRS you should properly document your claim (usually with the assistance of a qualified service provider). Steps you should consider taking to ensure proper documentation up front include the following:
• Obtain written advice. Unlike the PPP, no governmental agency will review your facts and indicate that you qualify before issuing funds. You should expect your service provider to be willing to do that in writing. Qualification for the ERTC is not always straightforward and can be somewhat subjective.
• Look for appropriate expertise. Qualified providers should be familiar with the levels of surety applicable in issuing written advice (levels of assurance can include will, should, more likely than not, substantial authority, the realistic possibility of success, and a reasonable basis to conclude). Qualified providers should also have professionals that have issued written tax advice in situations unrelated to COVID relief.
• Insure it. Qualified providers should be able to demonstrate that their work is covered by professional liability insurance that provides coverage should there be an issue with their advice. Further, if a potential partner wasn’t around before COVID, make sure they will be there five years from now when a potential audit requires defense of your claim.
In selecting a service provider to assist you in claiming such a significant tax benefit, you should also take into account their experience in matters of tax controversy (the IRS has already indicated they believe many claims have been made inappropriately).
Our Tax Experience
Being audited by the IRS as an individual or a business can be stressful, expensive, and downright scary. However, a properly documented ERTC claim doesn’t have to be.
At Arvo, our ERTC team includes seven tax attorneys or former CPAs who have represented numerous multi-billion dollar employers in matters of controversy before the IRS. One of those professionals reviews and signs off on every ERTC claim made by Arvo customers and is prepared to assist in any inquiry or controversy arising with the now fully funded Internal Revenue Service.
The consequences of filing inappropriate and/or inadequately documented claims under the employee retention tax credit include penalties, interest, and potentially damaging publicity. If you pursue participating in the program, make sure the partner you choose is prepared to help you not just today but far into the future if/when the IRS comes calling.
Arvo transforms cash flow for businesses through employment tax credit opportunities. Founded by tax experts, Arvo believes in the power of tax credits for improving business finances and built its cloud-based platform to help more businesses unlock the full value of federal and state incentive programs. Backed by technology and unparalleled client service, Arvo collaborates with companies to help them understand their qualifications and delivers actionable insights for leveraging programs that impact hiring decisions and fundamentally improve the economics of their business.
¹ Internal Revenue Code Section 3134(l).