Warning to Tax Professionals: Use Care When Reviewing Clients’ Employee Retention Credit Positions by CORY STIGILE
On March 7, 2023, the IRS Office of Professional Responsibility (“OPR”) issued an OPR Alert titled Professional Responsibility and the Employee Retention Credit. This OPR bulletin (Issue Number: 2023-02) (the “OPR Alert”), was issued on the same day the IRS issued IR-2023-40, which renewed an October warning to employers about certain third-party advisors in the marketplace urging employers to claim the ERC without appropriately advising about limitations on eligibility and the correct computation of the credit.
Congress enacted four iterations of ERC relief during 2020 and 2021 to encourage “Eligible Employers” to keep employees on their payroll despite experiencing economic hardships related to the COVID-19. The ERC ultimately helped many businesses that continued to pay payroll while shut down due to the pandemic or had significant declines in gross receipts from March 13, 2020 to December 31, 2022. While the refundable ERC in each period was similar in how it was administered by the IRS through a company’s payroll tax filings each quarter, there were important differences in the eligibility requirements for the ERC over this period. Responsible tax professionals did their best to navigate these changes and digest the plentiful IRS guidance during the pandemic. A helpful comparison chart of the 2020 versus the 2021 eligibility requirements is now available on IRS.gov. With the benefit of hindsight, the IRS’s cumulative guidance can help professionals evaluate what transpired since 2020 and advise clients regarding any exposure regarding their ERC positions.
By 2022, tax professionals had called out for IRS guidance and publicity regarding certain promoters who continued to solicit employers to use credits improperly. The IRS’ published warning in IR-2022-183, October 19, 2022, was well received because it gave tax professionals a publication to show to their longstanding client contacts to rebut what the employers heard through third party solicitations. As noted in the OPR Alert, these third-party advisers could charge hefty upfront fees or a fee contingent on the amount of a refund, leading some employers to claim excessive ERCs based on improper positions as to employer eligibility and computation of the credit.
In any event, the OPR Alert highlights some professional obligations to consider regarding ERC positions. For instance, Section 10.22(a) of Circular 230 requires a practitioner to exercise due diligence in preparing and filing tax returns on a client’s behalf. Also, the OPR Alert addresses section 10.34(c), under which a practitioner is required to advise a client of potential penalties on a tax return the practitioner prepares for the client or when the practitioner has advised the client about the position taken. A complication for practitioners addressing the reporting of the ERC is that while ERC benefits are utilized through the filing of an employer’s payroll tax returns (or amended payroll tax returns), obtaining the ERC impacts the ability for a company to deduct such wages on the employer’s income tax filings. Accordingly, return preparers need to consider reported positions on returns they did not prepare in order to properly evaluate the overall ERC reporting positions. In addition, the ERC is restricted in quarters for which wages were reported as payroll costs in obtaining Payroll Protection Plan (PPP) loan forgiveness, or were used to claim certain other tax credits. Also, as noted above, the rules differ depending on the quarter in which the wages were paid.
As foreshadowed in the IRS alerts and notices cited above, the ERC filings for the 2020 and 2021 tax periods, and forthcoming refund claims reflecting ERC benefits for these periods, are ripe for IRS examinations and enforcement. With an extended statute of limitations, the IRS will have additional time to conduct these examinations. Accordingly, tax professionals should review their clients’ reported ERC positions with care and consider their requirements under Circular 230 and other ethical standards when giving advice in this area.
CORY STIGILE – For more information please contact Cory Stigile – email@example.com. Mr. Stigile is a principal at Hochman Salkin Toscher Perez P.C., a CPA licensed in California, the past-President of the Los Angeles Chapter of CalCPA and a Certified Specialist in Taxation Law by The State Bar of California, Board of Legal Specialization. His representation includes Federal and state controversy matters and tax litigation, including sensitive tax-related examinations and investigations for individuals, business enterprises, partnerships, limited liability companies, and corporations. His practice also includes complex civil tax examinations.