Employee Retention Credit IRS Restrictions

The Employee Retention Credit (ERC) has been a highly discussed government credit over the last couple of years and has been the source of many solicitations offering assistance in acquiring large tax credits. Please be aware the ERC is currently the largest federal tax scam being used by these third-parties.

If it sounds too good to be true, it probably is. The IRS has “sounded the alarm” repeatedly regarding a scam involving the Employee Retention Credit (ERC). Third parties have been aggressively promoting that businesses may be eligible for the ERC when they are not.

Perhaps you have heard advertisements, phone calls or text messages claiming your business is eligible for the ERC and claim the application process is “easy.” These third parties will then charge large upfront fees or charge a fee based on a percentage of the refund amount the ERC generated. However, these ERC scams lie about eligibility requirements and your business will not only need to return the refund and amend employment tax returns but may be subject to penalties and interest.  Some include a disclaimer that they are not responsible for determining eligibility, the taxpayer is.

The ERC is a refundable tax credit that was introduced during the COVID-19 pandemic to provide an incentive to employers to keep employees on the payroll. The ERC was available to eligible employers for qualified wages paid after March 12, 2020, and before October 1, 2021 (with an exception for recovery start-up businesses through December 31, 2021).  Certain employees may qualify under different methods:  1. a decline in gross receipts meeting certain thresholds or 2. a full or partial suspension of operations.  The second method is subjective and requires an analysis of the facts and circumstances to determine if a governmental order had more than a nominal effect on your operations.

The eligibility requirements, applicable time periods, and dollar limitations changed several times due to the passage of various federal legislation therefore the ERC is far more complex than these ERC schemes make out. 

Recently the IRS released additional guidance regarding the supply chain constraints that has made the eligibility for the credit via this route extremely difficult. In order for your business to claim the supply chain constraints, you would need the following:

  1. Been deemed an essential business
  2. Experienced delays in receiving critical goods from your supplier
  3. Only be claimed during the time of a government mandated shut-down
  4. Provide the government order impacting your supplier’s business operations
  5. Provide evidence you could not find an alternate supplier of goods even if that meant paying a higher price for those goods

If you have recently claimed the credit via the supply chain constraints route, we recommend that you set aside the funds or at least be aware that the funds, plus interest and penalties, may need to be repaid to the IRS if your claim is audited and determined to be ineligible. There is a three year time frame under which the IRS is allowed to audit your refund claim.

If you would like to discuss the ERC, please reach out and we can work together to determine if your company can qualify for the credit. If you have claimed the ERC through a third party and are concerned about your eligibility for the credit, please contact us so that we can help you resolve any possible underpayment or erroneous refund that occurred.