Employee Retention Credits - here come the audits!

Many not-for-profit organizations were able to take advantage of the Employee Retention Credit. The Employee Retention Credit (ERC) is a fully refundable payroll tax credit that was initially introduced as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which was signed into law in March of 2020. The ERC provisions were implemented to provide economic relief to organizations affected by the COVID-19 pandemic and encourage them to retain their employees during the challenging times brought about by the global health crisis.

Recently, some NFP organizations are beginning to see letters from the IRS notifying them of an examination or audit of their ERC refund claims. All organizations that pursued the Employee Retention Credit should be prepared to support their qualifications, eligibility and calculations in advance of hearing from the IRS. If not already done, building a file and retaining the appropriate documentation of qualification and the computation is critical to a successful outcome should your organization be chosen for an audit. The Baker Tilly team is available to assist clients with their IRS inquiry.

Some not-for-profits are also sharing the aggressive sales tactics employed by national ERC “consultants” promising large credit amounts waiting for not-for-profit organizations that sustained employees over the time of the pandemic. The majority of these consultants are indicating organizations qualify by way of a full or partial suspension of or modification to their business due to a government order. However, determining a more than nominal impact to operations based on a governmental order is highly subjective, and not nearly as straight forward as the consultants typically indicate. Organizations engaging with many of these consultants are pleased to hear about their waiting cash windfall, but it is critical to fully understand and apply the law and guidance (though the latter is limited) before submitting a refund claim.

Fraud surrounding Employee Retention Credit refund claims continues with the IRS advising organizations to beware of consultants coming forward with claims that perhaps sound too good to be true. The IRS has issued warnings against these aggressive ERC claims. The IRS first alerted taxpayers to the dangers of pursuing incomplete ERC claims in October of last year, in response to concerns raised by the AICPA and the accounting industry at large. They are urging organizations to avoid engaging with ERC “credit mills” that are aggressively promoting ERC schemes in radio ads and online. You can read more information on these warnings in our tax alert.

The IRS continuously works to improve fraud detection measures, strengthen oversight, and address fraudulent activities associated with the ERC. It’s critical for organizations to be sure they have a strong understanding of the detailed ERC eligibility criteria before relying on a consultant’s calculations or signing a large dollar contract.

Three Baker Tilly specialists have provided ERC-related insights to consumers, tax professionals and the broader business community in leading publications.

In an article with Accounting Today, senior manager James Creech shared insights for tax professionals helping clients through the increased scrutiny of ERC claims from the IRS.

Nicole Szczepanek, principal and leader of our corporations tax vertical, shared insights with Bloomberg Tax about how the misuse of the credits has impacted diligence work needed on M&A transactions for tax practitioners in the Fraud-Laden Pandemic Credit Causes Headaches for Buyers in Deals article.

And most recently in Inc., senior manager, Michael Wronsky, shares considerations for businesses waiting on their payout.

Whether you are curious about the misuse of credits or want to stay up to date on changes and payouts, Baker Tilly is here to keep you informed. For additional information on the ERC, listen to Baker Tilly’s NFP specialists as they highlight unique considerations for not-for-profits and what it could mean for your organization. Also, for additional information on updates to the ERC you can view our on-demand recording on Updates to the Employee Retention Credit.

Contact your Baker Tilly representative or connect with us today to review your potential ERC refund claims.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

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