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IRS Provides Guidance on Reporting Employee Retention Credit Claims

March 23, 2023

Did you use someone other than your tax preparer to claim Employee Retention Tax Credits? Be prepared for some additional questions from your tax preparer concerning your eligibility.

The IRS Office of Professional Responsibility has issued a new bulletin to tax preparers regarding tax returns prepared that report ERC refunds. This bulletin is in direct response to the IRS’ enforcement actions relating to ERC Mills that may be improperly advising taxpayers they are eligible for ERC claims and helping them obtain refunds. As the taxpayer, you are likely wondering how this new bulletin affects you. We have the details here.

ERC refresher

The Employee Retention Credit was created under the CARES Act to provide financial relief to employers who kept workers on the payroll during the COVID-19 pandemic. Subsequent legislation expanded and extended the ERC through 2021.

More about ERC mills

Check out our blog, IRS Warns Employers to Beware of Companies Promoting ERC Services for more background information on ERC mills.

How will this bulletin affect me (the taxpayer)?

Based on the new bulletin, if tax preparers were not involved in their client’s ERC claim process, they will need to ask additional questions of their client to make sure the claims are reasonable.

If your ERC claim was prepared by someone other than your tax preparer, there are two main areas that you should be prepared to review with your tax preparer –

  • Eligibility - One of the first questions your preparer will ask is how the entity’s eligibility was determined. As a reminder, there are only two ways to qualify for the ERC, an eligible drop in gross receipts or being subject to a qualified government shutdown order. Be prepared to provide support to your preparer such as copies of the drop in gross receipts’ calculation or copies of the shutdown orders used to qualify.
  • Calculation - Next, your preparer may ask for support for the ERC claim to verify that the calculation was accurate. They will be looking to make sure that the appropriate wage caps were applied, and that ineligible wages or related individuals were not included in the calculations. Ineligible wages include those wages funded by Paycheck Protection Program Loans that were forgiven and wages paid under the Families First Coronavirus Response Act (a/k/a COVID sick pay).

In addition, the preparer may communicate how to properly report the ERC claim which could require amending previously filed tax returns.

What happens if my tax preparer is questioning my eligibility?

If your tax preparer is unable to determine that your ERC claim has a more likely than not chance of being upheld under IRS review, they will discuss with you the potential risks and financial penalties the entity is facing.

More to come from the IRS

The IRS Office of Professional Responsibility has indicated that more bulletins will be forthcoming on this matter. As we’ve noted in previous blogs, ERC enforcement will be a top priority for the IRS over the coming years and taxpayers may be facing significant financial consequences for improper ERC claims.

Questions? We can help.

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