As of March 20, 2023, the IRS has published five documents expressing that the employee retention credit (ERC) is rife with fraud because of unscrupulous tax credit shops. See October 19, 2022 (press release); November 7, 2022 (COVID Tax Tip); March 7, 2023 (press release); March 7, 2023 (OPR Memo); March 20, 2023 (IRS adds promoter claims involving the ERC to its Dirty Dozen list of tax scams).
The most recent guidance added tax promoter claims involving the ERC to the IRS’s annual Dirty Dozen list of tax scams. That’s never good. The IRS is actively auditing and conducting criminal investigations into ERC claims and has advised taxpayers multiple times to “think twice” before claiming the ERC.
IRS Doubles Down on ERC Warning to Taxpayers
On March 7, 2023, the IRS issued guidance from its Office of Professional Responsibility (OPR). Among other things, the OPR memo reminds tax professionals (TPs) that they must be diligent as to the accuracy of ERC claims and that they should not prepare an original or amended income tax return that claims or perpetuates an improper ERC claim. This means that even if a TP did not prepare or advise the taxpayer on its ERC claim, the TP cannot perpetuate an improper ERC claim by filing an amended income tax return to include in income the amount of the ERC. The OPR memo can be distilled as follows:
- If the practitioner cannot reasonably conclude that the client is or was eligible to claim the ERC, then the practitioner should not prepare an original or amended return that claims or perpetuates a potentially improper credit.
- TPs who prepare tax returns for clients have a duty of due diligence to inquire of their clients with sufficient detail to ascertain the information necessary to determine clients’ eligibility for the ERC and to claim the proper amount of the ERC on the clients’ returns.A TP can only accept a client’s responses at face value if they are reasonable and cannot ignore information the TP knows or has received from the client. If the information from the client appears to be incorrect, incomplete, or inconsistent with other facts the TP knows, the TP cannot simply accept the client’s information but must make further inquiries of the client to reconcile the incomplete, incorrect, or inconsistent facts.
- If a TP learns that a current client did not comply with the ERC requirements in a prior tax year, the TP must promptly inform the client of the “noncompliance, error, or omission” and any penalty or penalties that may apply.
It is important that you talk to your tax professional before you consider applying for an ERC. The IRS has already started to aggressively audit ERC claims, some even before they are paid, and has reportedly dedicated more than 300 employment tax auditors to the effort.
We have seen the IRS scrutinize taxpayers’ calculations of gross receipts and the reasons behind a claimed suspension of business operations. Remember that just because a taxpayer had to purchase PPE or require social distancing, it did not necessarily have a partial suspension of business operations. Also, vague and generalized claims of supply chain issues are not enough; they need to be tied to a governmental order that affected a U.S. supplier.