The ERC: Overview of IRS enforcement efforts

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Creech, James

Hi, I'm James Creech.

I'm a director of Baker Tilly on our tax advocacy and controversy team, and I'm here today to talk a little bit about the employee retention credit, or ERC. ERC has been one of the hottest topics in IRS enforcement and the reason it's been such a hot topic is it was a powerful pandemic relief tool that provided direct cash and taxpayers' pockets as a result of wages paid to eligible employees.

This tool was initially designed to be a pandemic relief measure to keep millions of Americans employed at a time when there was deep uncertainty about the future of the economy, whether or not the pandemic was going to last months, years, decades. And what Congress intended was an easy way to put cash in taxpayers pockets. Now, this sounds great.

And how did this program become such a hot topic with IRS enforcement?

Well, the difference is really a set of expectations.

What Congress intended was a temporary measure. But given the way the law was written, there was a lot of vague language that allowed for interpretation, not only for taxpayers, but for other promoters who came in and decided that this was a good opportunity to market credit services and then charge a contingency fee, which would allow them quick cash with no rest, because often they were not the ones who signed the 941 X’s claiming the credit.

And they provided limited work, limited analysis and cash large checks in many instances.

Now, the expectations from the IRS were that this was going to be a helpful credit, but over time they became aware of these promoters coming in, claiming large credits for taxpayers that may or may not have been eligible and inundating the system with hundreds of thousands of claim that stretched on for years after the IRS expected the claims to start to dry up.

Now you've seen some of the IRS responses in the news.

Maybe you've even been waiting an extended periods of time for credits to be claimed.

The IRS has tried to combat these promoters and these false claims by implementing extended moratoriums, slow paying credits and announcing that the ERC is part of the IRS dirty dozen list.

It's tough for the IRS to compete with some of the advertising that was happening on TV.

It was tough for them to compete with the individual level and intention that these firms were able to promote to people.

And they have limited tools to combat this.

One of the tools they offer is audits where they verify the eligibility for the credit. The IRS has had two rounds of voluntary disclosure. If you’re watching this, the second round has probably just closed.

We don't know if we're going to get a third round of voluntary disclosure, and the IRS has been able to send out mass denial and “clawback” letters to 10s of thousands of taxpayers alleging that either they're not eligible because there was not a shutdown order or there was not a declining gross receipts.

Or saying your calculations were improper and you have to repay tens of thousands of dollars in excess ERC credits.

Now my life as a tax attorney revolves around defending taxpayers from the IRS.

Really, in the ERC, we're seeing two points of focus at this point.

One is audits.

IRS audits are ongoing.

When the IRS selects someone for audit, they really don't know why the ERC was claimed. One of the kind of continuing themes we need to think about here is that the IRS just doesn't have a lot of data.

941s, ones are often summary forms.

They do not contain the eligibility reasons.

They don't contain the detailed calculations and they don't contain a detailed analysis of why someone is eligible and what the impact of either a gross receipts, a decline in gross receipts, or a government shutdown orders had on businesses.

This can lead to taxpayers feeling like they have been unfairly targeted and it can lead to the IRS thinking they're not doing enough aggressive audits to make sure they're recouping some of these improperly paid credits.

So we do have an expectation mismatch.

The credits are the credit audits are often very much a challenge because these credits are what they call immediately accessible. Once the IRS says no, you're not entitled to this, you have a limited bite of the apple to go to appeals, make sure that somebody actually hears your point of view, or if they've determined the credits were improperly claimed, you just get a bill saying you have to repay hundreds of thousands, if not millions of dollars on very short order.

And there's the potential for penalties.

What makes this especially devastating is you have to keep in mind that many people who claim DRC pay the contingency fee.

And so you may have only received 80% of the credits claimed in cash, but you're being asked to repay 100% plus penalties.

This is why having someone represent you who is knowledgeable is very important from the get go, because the stakes are very high.

Likewise, the denials that are coming out are form letters.

The IRS acknowledges that they contain inaccuracies. By their own admission they’re only 90% accurate.

I would probably put that amount as a lower accuracy rate.

These notices basically say we've looked at the credit.

You don't qualify.

You don't get any credits, and if the taxpayer does not take affirmative action, they will not receive the credit.

There are procedural due rights. You are able to appeal one of these denials, but your time is limited and it's important to get someone to look at these credits, determine eligibility and file a protest as soon as possible.

Likewise with the “clawback” credits we’re seeing many notices go out that rely on IRS math error authority to say there was an error here.

We're seeing this based upon a mismatch of information. Again, the 941s that the credit is claimed on require taxpayers to put a number of employees on the form.

Often this is a set date and it's a static date and if you have a business where you have turnover during the quarter, it may not capture the full amount of employees who are eligible for the credit during the quarter in question.

These services are often detail oriented.

They require somebody who has deep knowledge of the credit and is on your side and can give honest opinions of whether or not these notices are accurate, whether or not you qualify for the credit, and what documentation should be sent in to respond.

Again, there's a mismatch of expectations. Taxpayers expect money.

They expect to be paid the credits that they claimed.

They expect that Congress enacted this for a reason.

And they expect to be made whole for the amount of wages they paid during the pandemic and keeping people on the payroll during a very difficult time.

Likewise, the IRS is looking at this from a skeptical point of view, saying that we expected a lesser number of these claims.

We know that these promoters were out there giving bad advice.

We know that many of the eligibility claims and analysis are lacking in substance, and while they might appear superficially valid, once you start digging down into the facts and the law the taxpayers don't qualify for the credit.

What Baker Tilly can offer is unbiased professional advice where we take a fresh look at this, we give you honest feedback on what your eligibility was, we try our best to understand the credit to the fullest extent that anyone can understand a very gray law that was written hastily as a pandemic relief measure.

We have been doing ERC in various formats from claiming the credit through audit defense notice responses for the better part of four years at this point.

If you have any questions, please do not hesitate to reach out to me or my colleagues at Baker Tilly, who will be able to assist you with this detailed, oriented and nuanced analysis.

Thank you very much for your time.