ERC is Alive & Well: Summary of IRS Webinar 11.2.23

The intent of this webinar was to provide updates on the Employee Retention Credit. A Q&A session was led by John J. McInelly, who oversees the ERC initiative for the IRS.

This webinar did a great job of:

Summarizing the history of ERC from 2020 to now.
Explaining how to withdraw an ineligible claim.
Reviewing the warning signs for fraud.
Emphasizing the importance of using qualified tax professionals.
Emphasizing the new ERC Eligibility Checklist.
Providing expectations for unprocessed or new filings.

Here are the highlights for businesses and nonprofits who either have not yet filed, or are wondering if and when their filing will be processed:

The ‘moratorium’ on new ERC filings ends December 31, 2023.
IRS continues to accept filings during the moratorium and will begin processing these beginning in January.
There were 600,000 filings made during June through August, far exceeding the capacity of what the IRS can handle. It is estimated by those working closely with the IRS that they can only process 40,000 a week. The moratorium was used to put more systems in place to protect taxpayers from bad actors and reduce the amount of time spent at the IRS on invalid claims.
The standard timeframe to process a refund check is now 180 days but can be longer for larger amounts. Many claim that individual checks over $200,000 can take up to 9-12 months. * An ERC filing is by calendar quarter. So, if you claim 6 quarters, you will receive 6 checks. The good news is that the IRS pays interest on this waiting period.
There have been a total of 3.6 million ERC filings thus far for a total of approximately $300 billion in claims. As of early September, $2.8 billion was discovered to be fraudulent. While this is only 1%, it could mean 40,000 filings or more, which requires a lot of IRS resources.
How can the warning signs be identified when filing an ERC claim? The most common types of fraud are: Fictitious businesses, inflated employee counts, stealing checks in the mail, and paying a large upfront fee to an imposter. The warning signs emphasized were: (1) Being told you qualify within minutes with almost no evaluation. (2) Being asked to pay a large fee up front to file the claim. (3) Being pressured to file, despite your unanswered questions.
The webinar emphasized what IRS Commissioner Danny Wurfel stated on September 14: “Businesses should seek out a trusted tax professional who actually understands the complex ERC rules…” ·
The new ERC Eligibility Checklist at IRS.gov/erc is a very helpful tool. It uses a simple YES/NO question format. You MUST have paid W2 employees in a trade or business, not 1099’s or an employee that works in your home. It also reviews some guidelines in order to claim that a supply chain is the cause of your disruption.

For this sake of value in this article, let’s explore the ERC Eligibility Checklist that was referred to in the IRS webinar:

Question 5 of the ERC Eligibility Checklist asks a critical and common question: Was the operation of your business or organization fully or partially suspended by a government order due to the Covid 19 pandemic? To help answer this question, a link is provided to IRS.gov/ercqualifying. This link connects you to: Frequently Asked Questions about the Employee Retention Credit, Qualifying government orders.

The FAQ / Qualifying section emphasizes that a disruption had to be caused by a government order, not a lack of demand due to the Covid 19 illness or voluntary closing. It also emphasizes that the mere change to telework does not necessarily qualify. Most importantly, Question 5 in this section helps more clearly define partial suspension:

What does ‘more than nominal’ mean when considering whether my business or organization was partially suspended? (added September 14, 2023) ANSWER (bold and italicized added for emphasis): “IRS will consider you to be partially suspended if more than a nominal part of your business was suspended by a governmental order. The IRS considers “more than nominal” to be at least 10% of your business based on EITHER the gross receipts from that part of the business or the total hours your employees spent working in that part of the business. If all parts of your business could operate but you had to modify how it operated, then we will consider you to be partially suspended if you can show that the order had more than a nominal effect on your business. We consider “more than a nominal effect” to be at least a 10% reduction in your ability to provide goods or services in the normal course of your business. …. For more details and examples, see Notice 2021-20, Section III.D, Questions 11, 17 and 18.”

In short, partial suspension is a reduction of an employer’s ability to perform normally, caused by a government order, that affects at least 10% of its gross revenue or 10% of its total employee hours. While there may be more rules that need to be applied from IRS Notice 2021-20, this definition can help create a foundation of understanding for the taxpayer when discussing their eligibility with a qualified tax professional.

Examples of Partial Suspension. In my next article, I will share several common examples of employers who qualify for ERC because they experienced more than a nominal effect on more than a nominal portion of their business or nonprofit. For many, it was the social distancing, capacity restrictions, and extensive cleaning requirements that either reduced their ability to either serve existing customers or acquire new ones.

Summary of IRS Webinar 11.2.23: While the delayed processing times and fraud efforts will continue, ERC is alive and well for those who use qualified tax professionals. Thanks to the new ERC Eligibility Checklist and FAQ’s, it’s now much easier to understand how a business, church, private school, or nonprofit can qualify. For the tax professionals who process ERC, all roads still lead back to IRS Notice 2021-20.

Editorial: The moratorium will prove to be a great catalyst for more clarity and more awareness, enabling potentially another 3.6 million employers to do exactly what the IRS urged them to do January 26, 2021: “Take advantage of the newly extended employee retention credit.” It might mean even longer delays at the IRS, but in time, it will all get done.

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