ERC Update

In September 2023, the IRS announced that it would stop processing new claims for the Employee Retention Credit (ERC) until the end of this year to combat fraud. This credit was created to help companies keep employees paid and decrease the risk of massive layoffs during covid. What emerged was marketing schemes targeting taxpayers in order for them to claim the credit, when they really weren’t eligible. “We are doing this in the interest of small businesses so that we can add new protections for the program,” stated IRS Commissioner Danny Werfel. “We want this program to work as it was designed, helping businesses that qualify under stringent pandemic requirements.” Because of the surge of thousands of claims and many not being eligible, the IRS has stopped processing claims and has clarified the requirements to be eligible to receive the ERC with updated FAQs in order to help taxpayers better understand if they are eligible or not.

1. Who is eligible?

One taxpayer that is ineligible yet “often targeted by ERC scam promoters” is an employer that “experienced supply chain disruptions but did not experience a full or partial suspension of operations by a qualifying order.”

2. Is being subject to a governmental order enough for ERC eligibility?

No, employers must demonstrate that the governmental order was related to COVID-19 and that it resulted in a partial or full suspension of their trade or business.

3. What does it mean to be partially or fully suspended?

The answer depends on “your specific situation.” However, an employer does not qualify if (1) all its employees were able to telework during the pandemic; (2) its customers were affected by a stay-at-home order, but no governmental order applied directly to the taxpayer’s business operations; or (3) it voluntarily closed its business or reduced its hours.

4. Is an employer suspended if it has a supply chain issue?

A supply chain problem, alone, does not qualify an employer for the ERC. The IRS offers a narrow and limited exception for situations in which an employer was not partially or fully suspended, but its supplier was. However, this exception applies only “when the employer absolutely could not operate without the supplier’s product, and the supplier was fully or partially suspended.” To prove eligibility for the ERC on these grounds, in addition to securing the governmental order pertinent to the supplier, the employer must demonstrate to the IRS that (1) the order caused the supplier to suspend its operations; (2) the employer could not obtain the same goods or materials elsewhere, “regardless of cost”; and (3) the order and resulting suspension of the supplier’s operations also caused the suspension of the employer’s operations. Employers should be wary of anyone who says that they qualify for the ERC “based on supply chain issues” without asking for data on how their business was affected, the situation of their suppliers, and relevant documentation.

With these added clarifications and the halt of processing ERCs the IRS hopes to deter fraudulent returns and catch up on ERC’s already processed.