The IRS recently issued Employee Retention Credit (ERC) claims guidance. Specifically, the IRS examined scenarios of claims involving supply chain disruptions leading to a full or partial suspension of operations.
A primary criteria ERC promoters and aggressive employers cite for ERC eligibility is a full or partial suspension of operations for either the employer company or their critical suppliers during 2020 and 2021, regardless of whether a government-mandated shutdown was issued. As AGH previously warned, these claims may be subject to further scrutiny.
What is the IRS’ position?
The IRS Office of Chief Counsel released a General Legal Advice Memorandum (GLAM) on July 20, 2023. The GLAM states the IRS’ recommended course of action related to pending audits of ERC claims based on a suspension of operations due to a supply chain disruption.
The IRS concluded that the CARES Act did “not include supply chain disruptions.” Instead, it provided a narrow, limited exception for employers that had to fully or partially suspend their business operations or because the suppliers who provided critical goods or materials to the employer were fully or partially suspended during the calendar quarter due to orders from an appropriate government entity.
The IRS continued, stating, “A supply chain disruption, by itself, does not rise to the level of a full or partial suspension primarily because no governmental [shutdown] order applies to the employer’s operations.” (Emphasis added.)
Additionally, the IRS Commissioner, Danny Werfel said the following at a recent tax forum, “…We continue to see more and more questionable claims coming in following the onslaught of misleading marketing from promoters pushing businesses to apply. To address this, the IRS continues to intensify our compliance work in this area.” (Emphasis added.) The Commissioner continued, “…But the biggest risk is being taken by the promoters pushing these schemes and businesses filing these claims. This is an area where we urge caution; those improperly claiming the credit could face follow-up action from the IRS.” (Emphasis added.)
How does the IRS legal advice affect employers?
The tax credit promoters conveniently ignore the government order requirement for suspended operations. They frequently claim that any effect of COVID on the employer or their supply chain will qualify the employer for ERC.
The IRS Memorandum and the Commissioner’s comments send a clear signal that those claims will likely be rejected under IRS scrutiny. While employers that can cite applicable government shutdown orders due to COVID-19 (also referred to as the “suspension test”) may still claim ERC for the period covered, they should be cautious of generic claims of disruption for the employer or their supply chain.
The IRS has begun to audit ERC claims aggressively. Employers must consider that they, not the ERC promoters, are responsible for the accuracy of their ERC claims. The employer will be the party required to repay unsubstantiated claims, plus penalties and interest.
In summary
You may be eligible for ERC, but the analysis and decision-making are not as simple as promoters would have you believe. The IRS is auditing these claims. AGH professionals can help evaluate your specific facts and circumstances to make an informed decision about your ERC eligibility.
If you have questions about your ERC eligibility or concerns about previously filing for the ERC, contact John Trowbridge using the information below.
Senior Vice President
Business Development
With more than 30 years’ experience in public accounting and an intensive tax background in tax planning and return preparation, John manages client relationships and focuses on the firm's prospective clients, assists industry teams in developing new prospects, and meets with clients. John’s expertise includes federal and international tax strategies, growth incentives, wealth transfer and estate planning. He has worked closely with manufacturers and mid-size companies and their owners/leadership providing a variety of profit-building tax strategies.
John earned a bachelor of business administration from Wichita State University and is involved in numerous professional organizations including: Kansas Society of Certified Public Accountants (KSCPA), American Institute of Certified Public Accountants (AICPA), Wichita State Auditing and Accounting Conference planning committee, Kansas Family Business Forum, Wichita Manufacturers Association Executive Board, Risk Management Association Board of Directors and the Kansas Global Trade Service steering committee for the Brookings Institute Global Cities Initiative.
NOTE: Any advice contained in this material is not intended or written to be tax advice, and cannot be relied upon as such, nor can it be used for the purpose of avoiding tax penalties that may be imposed by the IRS or states, or promoting, marketing or recommending to another party any transaction or matter addressed herein.