Businesses may still qualify for ERC despite IRS delay

The IRS recently delayed processing new claims on a COVID-era payroll tax credit because of fraud. Still, businesses might qualify for the credit depending on how the pandemic affected them.

CPA Melania Powell, tax partner at HoganTaylor LLP in Fayetteville, said the employee retention credit (ERC) was established in the Coronavirus Aid, Relief and Economic Security Act. The $2.2 trillion CARES Act was approved in March 2020.

The ERC is a payroll tax credit for employers that maintained staff during the COVID-19 pandemic. Eligibility is determined by a decline in gross receipts. To claim the 2020 credit, quarterly gross receipts must have declined at least 50% from the same period in 2019. The receipts must’ve fallen by 20% in 2021 from 2019 to claim the 2021 credit.

Powell said “fly-by-night firms” have been telling employers they qualify for this credit but might not be eligible for it.

“It’s become such a big issue,” she said. “It can be a massive credit. It’s just there’s starting to be a lot of fraud around it. A lot of people do qualify for it and don’t know they qualify for it. You have to prove that you qualify for it.”

Qualified employers can receive up to $12,000 per employee per quarter, she said. They receive the credit by filing amended payroll and income tax returns. The deadline to file ERC claims is April 15, 2024, for 2020 claims and April 15, 2025, for 2021 claims.

In mid-September, the IRS delayed processing new ERC claims until 2024 because of the number of fraudulent ones.

She said the IRS is trying to determine “is there fraud here? Was there a governmental order in place that closed down your business, and you couldn’t do business or could you have still done business.”

Arkansas businesses didn’t face a lot of COVID-related government shutdowns, but some, such as physicians’ offices, were impacted, she said. Also, businesses might qualify for the credit because they were indirectly affected by the shutdowns, such as in other states. This might include an area business whose inventory was tied up at a West Coast port.

Powell worked with area homebuilders who struggled to receive windows to complete home projects. The windows were stuck at the Port of Los Angeles, and this delayed the projects. She said those doing business in states more shut down than others would more easily qualify for the ERC. She added that a qualifying shutdown order had to be a state or federal order, not recommendations from the Centers for Disease Control and Prevention.

Powell said HoganTaylor outsources their clients’ ERC claims to reputable tax consulting firms, such as alliantgroup. The firm maintains a database of all the COVID-related governmental orders that were issued in the U.S. to help clients determine eligibility.

Tyler Noesser, director at alliantgroup, said the IRS’ recent pause on processing ERC claims is a good thing as it works to ensure “everyone plays fair in the sandbox.” He added that the IRS audit rates for ERC claims have been low.

He said many of the new firms handling ERC claims started in 2021. As they made money from processing claims, they would spend it on advertising. He noted that one firm was spending nearly $10 million monthly on ads.

“They’re looking at it as they have no fundamental business outside of this, so it’s a cash cow. But when it’s gone, it’s gone,” Noesser said. “So they were trying to do everything they could to push it as hard as they could.”

For those who think they qualify for the ERC, Powell recommended they compare their quarterly gross receipts in 2020 and 2021 to 2019 levels to see if they meet the eligibility thresholds. She also recommended they seek a reputable firm to ensure they qualify.

Asked how to determine whether a firm is reputable, Powell said to find out how long the firm has been in business, specifically if it was established before the ERC went into effect.