As CPAs, IRS EAs and Tax Attorneys, we are no strangers to navigating economic uncertainty and ambiguity, and here we are again evaluating whether an ERC substantiation report makes sense for our clients. The COVID-19 pandemic presented challenges unlike any we’ve seen before. From sudden business closures to unprecedented government interventions, the past few years tested our resilience and adaptability in ways we never imagined.
The pandemic forced us to confront economic uncertainty head-on. Overnight, businesses of all sizes faced plummeting revenues, disrupted supply chains, and uncertain futures. As CPAs, our role became more critical than ever. Many professionals had to become ERC advisors. Clients turned to us for guidance on navigating complex government assistance programs, managing cash flow, and making difficult financial decisions.
Lessons Learned
One of the most significant lessons we learned during the pandemic was the importance of being proactive rather than reactive. As the economic landscape shifted rapidly, CPAs had to stay ahead of the curve, providing clients with timely, accurate, and strategic advice to help them weather the storm.
Another key lesson was the importance of communication. During times of uncertainty, clients look to their CPAs for reassurance and guidance. Regular communication, whether through phone calls, emails, or virtual meetings, helped us maintain strong relationships with our clients and provide them with the support they needed during challenging times.
Looking Forward
Looking ahead, it’s clear that economic uncertainty will remain a constant in our profession. While the worst of the pandemic may be behind us, businesses continue to face challenges as they navigate the road to recovery. One area of particular uncertainty is the Employee Retention Credit (ERC) program.
Changes in legislation and evolving guidance from the IRS have left many businesses unsure about their eligibility and how to take full advantage of the program, and more importantly, is my current claim valid?!
An Antagonistic IRS Posture
As tax professionals, we’ve all seen the recent narratives published by the IRS regarding the Employee Retention Credit: Per the IRS, it’s rampant with fraud and unscrupulous promoters pushing bad qualifications upon taxpayers. However, as tax professionals, we also understand the landscape at the IRS and their prerogative to dissuade taxpayers from pursuing legally obligated funds on the heels of first-in-decades IRS budget increases.
The budget increases have created a much more antagonistic environment to taxpayers as the IRS has had an invested interest in demonstrating their effectiveness – the result of which, so far, has been an increase in examiners and examinations over administrative processing. They’ve also guided policy making, guiding legislators to classify the ERC as essentially a listed transaction (See HR 7024). Given the hard line the IRS has taken, especially with the ERC, the question that most taxpayer representatives are asking themselves is what their responsibility is as the advisor to their clients in navigating this area.
The Law Is Favorable
The good news is that the underlying law is extremely favorable to taxpayers, but documentation and providing support and legitimacy to the claiming of the credit is in short supply. The best way for taxpayers to ensure that they are covered is to understand their method of qualification and to review the documentation provided by their credit provider to ensure it meets certain standards.
Two Ways to Qualify
There are two ways to qualify for the ERC; The first method, the gross receipts test, is the easiest to administer and the most cut and dry in the case of exam and exam defense. It’s a mathematical calculation and is based on the 2019 gross receipts values by quarter in comparison to 2020 and 2021 quarters. The majority of these qualifications will be difficult for the IRS to challenge, so clients classified with this method are likely to sustain in exam with little to no argument.
The second method of qualification is more difficult, as it applies a “reasonable persons” standard. This gray area of ambiguity is likely to be a focal point of exam, especially in cases where documentation is lacking. There are actually two parts to the secondary qualification: first, a government order that limits travel, commerce, or group meetings must be provided and secondly, the government order must have had involuntary requirements that forced the business to run at inadequate levels (a partial suspension of operations) or forced complete closures (a full suspension of operations).
Further Guidance Issued
Absent the normal guidance from the Department of the Treasury, the IRS created multiple guidelines around this ambiguous legislation, defining a “partial suspension of operations” as a more than nominal (10%) reduction in either gross receipts or employee service hours available for standard business operations. Furthermore, the IRS opened the door to looking through to suspensions caused by foreign operations “supply chain disruption” by initially allowing supply chain suspensions before trying to walk it back with more extensive documentation requirements asserted in a legal memorandum delivered in July of 2023.
Notably, the IRS asserted that the interpretation of whether a business passed the partial suspension test was based on “the facts and circumstances” of the taxpayer. This created a “reasonable persons” standard in applying the facts and circumstances of the taxpayer, leaving undocumented credit claims as easy pickings for exam.
Common Errors We’ve Seen in ERC Filings
In reviewing multiple reports given by providers of this credit, we’ve noted a lack of documentation as being the biggest issue for taxpayers. Many reports we’ve found only list calculations (many prepared with errors) and fail to provide an actual government order or narrative of facts and circumstances relating to the partial suspension of operations of the taxpayer. Despite this, we’ve found that many of these taxpayers taken in by promoters do, in fact, qualify.
However, the lack of documentation to substantiate in the case of exam is apparent. Meanwhile, government orders are disappearing from the internet and memories of the events of that time become more and more hazy.
An ERC Substantiation Report Can Create Defensibility
CTA realized that many of these claims were defendable with the right documentation. Utilizing our database of government orders built over the past two years as well as multiple methods for evaluating claims under the reasonable persons standards, CTA has begun offering a report to taxpayers who may have utilized sub-standard service providers. We can assess whether the taxpayer qualifies, which may include the return of excess credit utilizing IRS programs. As a preparer of tax returns for your client, and as the last line of defense in amending the associated income tax returns, you are in a unique position to be able to assist and cover your taxpayer.
Concerned? Take Us Up on a Free Preliminary Evaluation
If you are unsure of your taxpayer’s ability to withstand an exam, or if you think there may be some issues in how the ERC was prepared for your client, CTA would welcome the opportunity to analyze their reports and calculations and provide you with a free preliminary assessment of what it would take to increase their documentation standards, provide future possible exam defense, and/or return over-claimed credit.
Want to Study Up?
In addition, if you’d like another refresher or review of the rules yourself, we have a 2024 ERC Guidebook which provides exacting specificity of the issued legislation, notices, and general rules of the credit – email contacts below for your FREE COPY.
Benefits of an ERC Substantiation Report
The benefits of an Employee Retention Credit (ERC) substantiation report are multifaceted, making it an essential tool for businesses looking to validate their Employee Retention Credit claims while minimizing the risk of audits or penalties. Here are several key benefits of having an ERC Substantiation Report prepared by our tax credit advisors:
- IRS Compliance and Audit Protection: The substantiation report helps ensure that your ERC claims are well-documented and compliant with IRS requirements. This reduces the risk of audits and potential penalties, as the report provides a clear and detailed explanation of the credit
calculation and eligibility criteria. - Maximizing Credit Amount: A well-prepared substantiation report can help you identify all eligible wages and expenses that qualify for the ERC, potentially increasing the credit amount your business can claim. This ensures that you take full advantage of the available tax benefits.
- Streamlined Claim Process: An accurate and comprehensive substantiation report can help streamline the ERC claim process, making it easier for businesses to file the necessary paperwork and receive the credit in a timely manner. If funds should be returned to minimize audit
exposure penalty free, the tax forms can be properly prepared for efficient processing. - Professional Expertise: Working with a tax professional to prepare an ERC substantiation report provides access to their expertise and knowledge of the latest IRS rules and regulations. This can be invaluable in ensuring that your business receives the maximum allowable credit while
avoiding any potential pitfalls. Documenting the Partial Suspension of Operations and adherence to Government Orders can be especially challenging and was often overlooked by ERC Mills. - Peace of Mind: Having a solid substantiation report in place can provide peace of mind for business owners, knowing that their ERC claims are accurate, compliant, and supported by expert analysis. This can help alleviate concerns about potential audits or penalties.
- Improved Financial Planning: By accurately calculating and substantiating your ERC claims, you can better forecast your business’s cash flow and financial position, allowing for more informed decision-making and planning.
- Enhanced Credibility: A well-prepared ERC substantiation report can enhance your business’s credibility with the IRS, financial institutions, and other stakeholders, demonstrating your commitment to compliance and transparency.
By investing in an ERC Substantiation Report prepared by Corporate Tax Advisors, businesses can not only protect themselves from potential IRS scrutiny but also validate and maximize their credit claims and improve their overall financial planning and credibility.
Next Steps
If you are interested in substantiating your ERC Claims or you are concerned about your clients and filing the necessary amended returns, please contact one of our dedicated CPA relationship partners below.
Heather Fisher heatherf@corporatetaxadvisors.com Huntsville, AL Southeast
Beth Graham bethg@corporatetaxadvisors.com Fayetteville, AR Midwest / Southeast
John Park JohnP@corporatetaxadvisors.com Atlanta, GA Southeast
Sam Hyon SamH@corporatetaxadvisors.com Atlanta, GA Southeast
Laurie Mullinax LaurieM@corporatetaxadvisors.com Tampa, FL West Coast / PAC NW
Jordan Wilson JordanW@corporatetaxadvisors.com Atlanta, GA Northeast / Southeast
