The Employee Retention Credit is extremely popular these days. You can easily find online ads for many companies trying to sell you services for it. There are radio and tv ads. And teams of telemarketers are cold calling companies in hopes of finding another credit to claim. This would be fine if all of these companies put in the time and effort to vet the credits they are putting on a return properly. The IRS has made it clear that the Employee Retention Credit will receive a lot of attention for the next few years, by which time, many of these pop-up ERC experts will have closed shop and moved on.
If It Is Too Good To Be True, It Probably Is
I have been brought in to review several credits where the business’s owner or tax advisor suspected the credit was too good to be true. In one instance, the company had been quoted a credit that would have been approximately 130% of the existing wages. The tax credit is meant to help businesses keep employees on payroll during business interruptions due to COVID. It is not designed to pay all employees’ wages and then some. In 2020, the credit was 50% of wages capped at $5,000. In 2021, it increased to 70% of wages, with a higher cap of $7,000 per quarter. In no event could the credit reach the figures quoted to this taxpayer.
I do not know if the amount quoted would have made it to the final return because the client decided not to use that vendor, but these tactics are common during the sales process and sometimes make their way into the final claim.
Sometimes, You Don’t Get What You Pay For
In another instance, I was brought in to review a credit claimed by a tax consultant. When I asked for the information related to the credit, all that was provided were the amended 941s. A request for the workpapers and tax credit study was met with mostly silence. Eventually, a scan of some handwritten notes that hinted at the calculations and a page from an IRS notice was provided. There was no indication of how the taxpayer qualified for the credit, much less supporting documentation to prove they qualified. The calculations did not tie to what was on the return but were also completely incorrect.
Here, it was apparent that the vendor had not claimed tax credits before and did not understand what was required to substantiate a credit. The Employee Retention Credit requires either a decline in gross receipts or a full or partial suspension of the business. Not every company is going to qualify. Of those that do, not every business will qualify for every quarter. When the IRS reviews the credit, they will first ask how the business qualifies. If your vendor does not provide documentation to support your qualification, you should consider another vendor. This should include analyzing the relevant governmental orders when you qualify under a partial or full shutdown.
Additionally, you need to be able to understand how the numbers that get put on your return are derived. In this case, it required improperly claiming wages that should have been excluded to get even close to the number claimed on the return. The taxpayer will have to deal with the mess when the IRS starts to question the returns and will ultimately be liable for penalties and interest.
Here, the contingency fee far exceeded the amount of work or value that the vendor provided to the taxpayer. Ultimately, the vendor did little more than put the taxpayer at risk of a messy audit and hefty penalties by amending the 941s improperly. I am not taking a stance on contingent fee arrangements for ERC, but the credit can quickly balloon, bringing the fee along with it. If you are going to pay a significant amount of money for the credit, make sure you are getting your full value.
Ask Before You Sign
In the two examples provided today, one client’s tax advisor got ahead of the issue and started to ask questions before the damage was done. In the second, the taxpayer began asking questions after the fact and is now working to mitigate the damage. One of the good things about having so many vendors trying to sell the credit is that you can get any number of chances to asko questions.
The IRS has already started auditing the credit and will only increase the number of agents assigned to it as they hire and train more people. If you would like to have an in-depth conversation about your credit or are dealing with an IRS audit and your vendor is not assisting you, contact us today to discuss how we can help you.
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