Is Your Business Eligible for ERC or Is It a Scam?

“IRS cracks down on aggressive ERC marketing promoters and employers filing dubious claims”

On July 26, 2023, the IRS Commissioner, Danny Werfel, announced that the agency has made significant progress in processing Employee Retention Credit (ERC) claims and has now entered a new phase of increased scrutiny on dubious submissions while warning against aggressive marketing practices. The IRS is intensifying compliance work and implementing additional procedures to combat fraud in the ERC program.

Werfel stated that as the pandemic recedes, the number of legitimate ERC claims is declining, but the IRS is receiving more questionable claims due to misleading and aggressive marketing from promoters. The IRS is stepping up its audit and criminal investigation efforts on both the promoters and businesses filing fraudulent claims.

The IRS advises people to be cautious of warning signs of aggressive marketing, including unsolicited calls or advertisements with an “easy application process,” large upfront fees, and promises of quick eligibility determinations. Most often, these promoters are declaring eligibility based upon a partial suspension of operations due to supply chain disruptions. In order to combat these claims, the IRS recently issued additional guidance to help employers determine if they are truly eligible.

Is my business ERC Eligible due to supply chain disruptions?

Eligible employers must have partially or fully suspended operations due to orders from an appropriate government authority that limited commerce, travel, or group meetings. Below are 5 examples of ineligible scenarios.

Scenario 1: Employer A experienced delays in receiving critical goods from Supplier 1 during 2020 and 2021, which they assumed were due to COVID-19. However, Employer A continued to operate using its surplus stock of critical goods. Employer A inquired about shortages and Supplier 1 confirmed it was due to COVID-19 but could not provide a governmental order and Employer A could not locate one. The IRS concludes that Employer A is not eligible for the Employee Retention Credit (ERC) as they did not experience a full or partial suspension of operations due to their ability to continue business despite the supply chain disruption.

Scenario 2: Employer B was not subject to any governmental orders limiting commerce, travel, or group meetings due COVID-19 at any time. However, Employer B faced a bottleneck at the port with critical goods from Supplier 2 during 2020 and 2021, which they suspected was due to COVID-19. However, they couldn’t identify any specific governmental orders causing the bottleneck. Other goods were not stuck at the port but were delayed due to a truck driver shortage. Employer B saw a discussion on social media that there was a shortage because the drivers were out sick with COVID-19. The IRS determines that Employer B is not eligible for the ERC as they couldn’t substantiate a specific governmental order that led to the suspension of Supplier 2’s trade or business operations. Even if Employer B could identify governmental orders applicable to the bottleneck, Employer B must be able to substantiate that the bottleneck and the resulting suspension of Supplier 2’s operations was due to the orders.

Scenario 3: Employer C and Supplier 3 were located in a jurisdiction that issued governmental orders suspending their business operations in April 2020. Although the orders were lifted in May 2020, Employer C experienced delays in receiving critical goods from Supplier 3 throughout 2020 and 2021. The IRS states that Employer C is eligible for the ERC in the second quarter of 2020 due to the governmental order’s impact on their business. However, the residual delays in subsequent quarters do not qualify for the ERC once the order has been lifted.

Scenario 4: Employer D faced challenges in obtaining critical goods from Supplier 4 during 2020 and 2021 but managed to continue operating using an alternate supplier, which cost 35% more. The IRS determines that Employer D is not eligible for the ERC as they were not prevented from operating their business even though it incurred higher costs for critical goods.

Scenario 5: Employer E, a large retail business, experienced supply chain disruptions in 2021, which caused a shortage of some products and forced price increases on others. However, the product shortages did not prevent Employer E from fully operating its retail business throughout 2021. The IRS concludes that Employer E is not eligible for the ERC as they were able to continue their business operations despite the supply chain challenges.

Who is Eligible for ERC?

In summary, the Employee Retention Credit is applicable to businesses that meet specific criteria, including either a decline in gross receipts or a full or partial suspension of operations due to a governmental order limiting commerce, travel, or group meetings. However, as the scenarios above demonstrate, most businesses do not meet these criteria surrounding a full or partial suspension of operations.

To protect themselves, businesses and tax-exempt groups should work with trusted tax professionals, request detailed worksheets explaining ERC eligibility and computations, and only apply if they believe they legitimately qualify for the credit. If a business improperly claimed ERC credits, the IRS will need to be paid back, possibly with penalties and interest.

If you think you may qualify, read more about qualifications for the ERC or contact us at 513-858-6040.

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