Sifting through ERC questions | Tax Section Odyssey

The employee retention credit (ERC) continues to be a topic of conversation amongst taxpayers and their trusted advisers. Now that the IRS has placed an immediate moratorium on processing new claims to at least the end of 2023, additional considerations and challenges have manifested.

Justin Elanjian, CPA, Managing Director — Disputes, Claims & Investigations, Stout, chats with April Walker, CPA, CGMA, Lead Manager — Tax Practice & Ethics, AICPA & CIMA, and shares best practices for navigating the current ERC environment.

What you’ll learn in this episode

• Current ERC developments and how Justin is assisting his clients (0:50)
• Tips for taxpayers who have already claimed the ERC (4:55)
• How to advise clients contemplating withdrawing their claim (10:31)
• Advice for helping clients that have not yet filed for the ERC (16:22)
• Statute of limitation issues and recommendations to consider (19:50)
• Office of Professional Responsibilities (OPR) guidance around professional responsibilities around claims (26:23)
• What Justin is seeing in ERC examinations (33:05)
• Final thoughts (41:34)
• A page from Justin’s travel journal (43:45)

Related resources 

• ERC guidance and resources — The rules to be eligible to take this refundable payroll tax credit are complex. This AICPA resource library will help you understand both the retroactive 2020 credit and the 2021 credit.
• ERC suspended: What happens next | Tax Section Odyssey — October 16 has sunset. Tune in to this podcast to hear fellow CPA practitioner Brandon Lagarde’s experience with the 2023 extension season and what to expect in 2024.
• Employee Retention Credit (ERC): Fact or Fiction? — Use this guide to educate yourself and others on common misconceptions surrounding the ERC.
• Employee Retention Credit Decision Tree — Download the ERC decision tree to help you with various decision points when working with clients to protect yourself/your firm from significant risk.

IRS resources

• IR-2023-169 — IRS news release on Sept. 14, 2023, ordering the immediate stop to new ERC claim processing.
• IRS ERC resource center — IRS hub for ERC information, including links to guidance, FAQs and the latest news.
• ERC eligibility checklist: Help understanding this complex credit — IRS chart is used to help taxpayers figure out if they may be eligible for the credit. Use this chart if you are considering claiming the credit or have already submitted a claim to the IRS.

Transcript

April Walker: On today's podcast, listen to hear more about next steps with the ERC.

Hi everyone and welcome to the AICPA's Tax Section Odyssey podcast, where we offer thought leadership on all things tax facing the profession. I realized that today is our 100th episode, so I'm pretty excited about that. I'm April Walker, a lead manager from the Tax Section.

I'm here today with Justin Elanjian. He is at Stout, and he works as a managing director in disputes, claims and investigations. You can see where his angle might be coming from with the ERC. Welcome Justin.

Let's talk today about the current landscape of ERC and how you're assisting businesses today in your current role.

Justin Elanjian: Sure. Thank you, April, for the opportunity to be here and to the rest of the AICPA as well.

It probably helps to start with the current landscape and setting the stage as it informs how we are assisting businesses and CPA firms in navigating the employee retention credit.

As we've seen over the last several months and, in particular, over the last six weeks, there's been some significant changes to the program, particularly as it relates to the processing of claims.

Six weeks ago, we had the moratorium on processing new ERC claims, which has produced a flurry of additional questions that may not have existed previously. Then, we also have the additional scrutiny that is being placed on service providers on taxpayers who were claiming the credit. That's coming through in the form of communications from the IRS, for example, when they announced the moratorium and issued a number of warnings over the last several months, but also notably through the increased level of enforcement in the form of independent claim exams.

With all of this, there has been this delay in processing ERC returns that have been filed before the moratorium. Of course, we have the hold on processing claims submitted after the moratorium was announced on September 14th, that creates some additional challenges for taxpayers who are in need of the assistance with ERC refunds.

With the concerns pertaining to promoters and aggressive tactics, the IRS has asked on multiple occasions at this point for tax professionals to step in and that's really where we're getting involved.

When it comes to taxpayers or CPA firms — frankly it's both where we're providing opportunity and support, is we're evaluating a taxpayer's position as to whether or not they have a basis to submit a claim. So that upfront analysis and in particular as it relates to the full or partial suspension criteria. As we know, that's the subjective one and the increased level of diligence that's required.

But what we’re also seeing here that’s not drastically different, are circumstances in which taxpayers, at their own will or at the direction of an adviser, are seeking a second opinion. Or perhaps they've submitted a claim and want to understand the adequacy of their claim documentation, the associated risks, the opportunities to augment the documentation, etc.

Most recently, where we're spending the majority of our time is in providing audit support. That's coming through in the form of these taxpayers that are in receipt of an IDR (information document request) pertaining to one or more of the ERC claims that have been filed. For the CPA firms that have offered ERC services, there's a suite of risk mitigation services and risk management services that we offer to assist them in protecting both their firm and their clients that they may have assisted.

Walker: Wonderful. Thanks, Justin. That's a great introduction into where we are and like you said, the landscape. You mentioned the moratorium and mentioned the scrutiny by the IRS.

Let's talk first about taxpayers who have already claimed the credit. How are you advising them and what considerations do you think are really important for them to be considering as you are the CPA working with those types of businesses?

Elanjian: Sure. Like many situations and this one not being drastically different, the first item to really focus on is assessing the current reality. When it comes to the employee retention credit, that's heavily focused on the basis for the claim that was filed. That's inclusive of the nature and extent of the documentation that has been produced to support that basis or substantiate that.

Since the inception of the program and frankly, even since the issuance of the various notices throughout 2021, we've continued to see this evolution from the IRS.

Frankly, we've seen it from the ERC market as a whole, and interpretations of the statute and changes to such. We've seen that through updates to the IRS FAQs. We’ve seen it through public comments by the IRS or press releases. And there may even be further extended into the supply chain general legal advice memorandum that was released in late July.

It's further observed by the IRS’s approach and the positions that are being taken in these claim exams that I mentioned or audits. We'll use those terms likely interchangeably throughout the course of this discussion. I know we'll talk about that in further detail later.

But when it comes to the taxpayers that have filed the claim, the first step is reviewing the nature of the agreement they have with whichever ERC service provider they sought assistance from.

To understand the responsibilities of the taxpayer as well as those of the ERC service provider. Service providers have mainly consisted of your tax incentive firms, your law firms, accounting firms, consulting firms and payroll processors. The nature of services and the extent in which they're offered vary not only by the type of business, but even within the type of businesses, the scope of services may differ and likely does.

It's a critical item to understand as we continue to see taxpayers that are operating under the assumption that the ERC service provider, whoever that was — I'm just referring to a third party that was engaged. That may have an assumption that the eligibility information and documentation to substantiate [ERC claim] was produced or evaluated by the ERC service provider.

There are various third parties who rely on taxpayer attestation and that the taxpayer understands the rules of the program. They've made a determination that they're eligible for the credit. They have asserted to the fact that they've identified and maintain the relevant documentation to support their claim. It's a really important component to understand — where might this documentation come from and who was responsible for producing it — as we consider the substantiation requirements in [IRS] Notice 2021-20 and specifically Q&A 70.

Then, once we understand where the information comes from, it's a matter of understanding the completeness of the documentation. We've continued to experience situations in which taxpayer has a narrative regarding our full or partial suspension of operations, but they don't have any supporting schedules, there's no details or evidence that corroborates the commentary.

And during exams, the IRS is certainly seeking this information, as well as copies of the government orders that were determined to be relevant to causing the business' limitation or restriction or other modification of the taxpayers’ operations. Really getting hands around the documentation that exists, so then we can then move into the next step, which is understanding the reasonableness of the position.

Now, short of very limited circumstances, the program, as we know it, is highly subjective and lack of case law and situations that some may perceive to be moving the goalpost.

Insert supply chain glam here, only makes that more challenging. I know we'll probably talk more about the OPR Guidance and tax preparer responsibilities.

I'll just briefly note that here, but we don't see this as necessitating or recreating the wheel or reperforming the analysis. But reviewing the documentation in the position to determine if there's a reasonable basis for the position, recognizing there's differences in interpretation of the guidance and applicability to the taxpayers’ factors and circumstances. That's really step one if you've claimed or you're working with a taxpayer who has already submitted a claim for the credit.

Walker: Another set of clients, [we’ve talked those who have already] filed the claim. Now let's shift to how you're advising clients contemplating the withdrawal program. Also, we don't have the details yet about the settlement program, but just in thinking about what are their options and what are their considerations?

Elanjian: It's a great question. I think this is where I would say the majority of taxpayers fall, is what do I do now?

The number of communications, the phone calls, the emails that are prompted every time there's a release of something from the communication from the IRS, or somebody attends an industry conference. ERC continues to be a topic and as a result of each of these prompts further discussion and in many cases it's very much warranted.

We have the point where we have understood our clients or if you're the taxpayer, your situation, the basis of your claim and the associated documentation. When we get to the point where we understand the reasonableness of the claim, we end up with this known unknown. We look at what are the options to consider and, April, as you mentioned, there's some that we have been informed of a process like the withdrawal program that was recently announced by the IRS or what we expect to come forward as it relates to the voluntary settlement program.

When the adviser or the taxpayer is evaluating what to do next, that is coming from the perspective of “we understand our basis for eligibility. We understand the documentation that exists or perhaps what documentation doesn't exist or where it may be lacking.” It's the next stage of evaluation. What do we do about this? When we're looking at, whether it's the withdrawal process or a settlement program as being considerations, that's heavily dependent obviously on whether or not they've received their ERC refunds.

As we know the withdrawal process provides an opportunity to effectively reverse a claim. Withdrawal of the claim if it has not been refunded but to the extent that it [hasn’t] been refunded, that's expected to be addressed with the details of the settlement program.

I think when we're looking at all of this and before making any decision, it's recognizing what's coming forward. As we see some of the communications from the IRS and we look at the moratorium announcement, it makes reference to more information that may be requested. It shifted the [IRS] processing from 90 days to 180 days, but further indicated that if additional information is necessary, that it could be much longer.

Then in light of the suspected fraud, abuse, or improper claims that have been filed, the IRS may seek more information. That's what I'm referring to now as maybe the more proactive type of information document request, which is the information document requests that comes before the refunds have been disbursed.

That's an important consideration as we think about the communications from the IRS where they noted that they believe that many of the applications that are currently filed are likely ineligible. And that it's at least anecdotally noted that they're seeing instances where 95% or more of the claims coming in recent months are ineligible. [They] are attributing that to promoters that continue to aggressively push people to apply regardless of the rules. That was the communication that came forward with the announcement of the moratorium.

What that presents itself is needing to understand their position and the documentation so they can determine whether or not they have an improper claim. Does that suggest that they may pursue the withdrawal process or wait for the details of the settlement program? Perhaps, but the subjectivity of the program and a lack of the historical case law also presents this alternative which I think is where we're [seeing] a majority of taxpayers falling.

Whether we care to admit it or not, there's undoubtedly taxpayers who may review their position, may review the reasonableness of their position and recognize that it is highly subjective, and choose not to pursue the withdrawal program, this settlement program, and take more of a wait-and-see approach.

It's known that the IRS will only have the manpower and the capital to audit so many of the claims and with more than 3.6 million claims filed. There's a possibility that taxpayer claims never get a second look from the Internal Revenue Service. That's probably the last bucket and I think it's probably the largest bucket that falls, is whether or not to take any action.

In all cases, first step before reversing a claim, before returning funds to the IRS is make sure that you understand your current situation or if you're the adviser, understand your client's current situation so that there's an opportunity to have the relevant information in front of you to make informed decisions on the next step.

Walker: I think those are great considerations.

Certainly, we're not advocating for playing the audit lottery. That is not what Justin nor I are saying. But it is a fact of the matter that there may not be a clear decision, there might not be a clear yes or no. Wait and see, may be the best approach at this moment.

There's another group of businesses that I'd like to talk about for a minute that actually haven't filed their claim yet. For whatever reason — hadn't gotten around to it — whatever the reason is. How are you approaching those conversations with those businesses?

Elanjian: Everything we just spoke about pertains to taxpayers who have already claimed the credit.

To your point, April, there's still businesses who are evaluating whether or not they should submit a claim. It's important to note as we've heard misinformation, as it relates to the moratorium, to clarify that the moratorium [does] not limit the ability of a taxpayer to file an ERC claim.

It's simply noted that the IRS will not process any claims filed on or after September 14th until at least 2024. That opportunity does still exist.

Some in the market may suggest that this is more of a timing consideration for a taxpayer. Considering claiming the credit in light of the heightened scrutiny and the IRS perception that the vast majority of claims recently filed are improper.

However, the guidance to taxpayers considering claiming the credit remains substantially the same as it was prior to the moratorium. With or without the assistance of an ERC adviser, it’s important that the taxpayer understands the rules of the program and how they may apply to the taxpayers’ facts and circumstances so that they can make informed decisions pertaining to their basis for eligibility and if one exist, submitting a claim for refund.

That's easier said than done as the moratorium certainly created some hesitation for taxpayers considering claiming the credit. But it shouldn't deter a taxpayer who believes they are rightfully entitled to the credit from submitting a claim.

Where this really comes down to of what's new as we think about the moratorium, or what’s an increased focus in determining whether or not to file, or perhaps when to file is recognizing that the opportunity to claim 2020 employee retention credits will expire due to the statute of limitations come April 15th of 2024.

If you’re working with a business that is evaluating claiming the credit, is unsure whether or not to submit or when to submit, once there's an appropriate basis to claim the credit. And of course, all the corresponding documentation and the calculations have been performed, go ahead and file. We want to ensure that taxpayers don't lose out on the opportunity to submit a proper claim before the expiration of the statute of limitations coming forward in approximately six months.

Walker: Very good. Shifting gears a little bit.

Hand in hand with the claim for ERC is the businesses' requirement to amend the corresponding income tax returns for the claim. Let's acknowledge we're not going to debate the fact [and] we agree that the IRS guidance requires amending the 2020 or 2021, obviously, depending on the year of the claim. That is a fact.

But given the moratorium, the fact that we know the IRS has a backlog of claims, let's talk about some of those issues around statute of limitations for those income tax returns.

At this point, nothing has happened to change the statute of limitations. What recommendations could practitioners consider?

Elanjian: Sure. It's a great question. April, I will acknowledge what the IRS guidelines require as it relates to when to amend an income tax return.

There's clear guidance from the IRS, we continue to hear and see income tax preparers look to address the ERC claim perhaps in a year in which the refund was received. Again, that is contrary to the guidance produced by the IRS, which illustrates that the income tax returns should be amended for the year in which the credit is determined, which was either 2020 or 2021.

Now, with that being said, going back into your question here about statute of limitations and what that would mean, it's something we continue to see surface more regularly as we're nearing the income tax return statute of limitations as it relates to 2020, which is coming due here in the next few months. Frankly, it's a dilemma for the tax practitioners that the IRS really hasn't provided a definitive solution for, at least not yet.

On one hand, we have a backlog of several hundred thousand ERC claims. It's unclear when the IRS will process them as we consider the fact that taxpayers can still submit amended returns to claim the credit.

That's only further exaggerated by the fact that as we're observing the IRS continuing to audit these claims, including those that were previously processed for which refunds have been disbursed. The outcome of these audits, inclusive of IRS decisions, those that may be appealed or brought forward in tax court will not be fully resolved until after the statute of limitations on the 2020 income tax return has lapsed.

That's for some unknown amount of taxpayers. It's just really more of a timing thing.

That's in turn lies the challenge where taxpayers who have previously amended their end of 2021, but really our timing sensitivity is around 2020, income tax returns to reduce their wage deduction as instructed by the IRS and may end up in a situation that after the statute of limitations expires, a credit that was claimed may be disallowed in whole or in part.

We've talked a little bit about protective claims and what we're hearing about that and that's protective claims for refund. Where that seems to fit and maybe where it doesn't pertain to this question is when it comes to the ERC claim, there may be a consideration to file a protective claim against the refund, which can occur when there's a contingent event. We really [mean] in this case is the resolution of an eligibility position taken perhaps, we're observing to see what happens with supply chain as those are brought forward and litigated and what that might that mean. That can provide an opportunity for the taxpayer to subsequently perfect the claim after the statute of limitation lapses provided that the basis for the claim is not materially different.

But that's for the claim for refund which is facilitated through most commonly the filing of a Form 941-X. That's different than the income tax return issue that we're facing where we're not afforded that same opportunity.

When we're amending our income tax return, we're reducing the wage deduction. We're not claiming a refund through the filing of the income tax return. What's been made available to us and what's been communicated to us through [IRS] Notice 2021-49 as it clarified, the income tax return implications, is that an amended return should be filed or administrative adjustment request.

The administrative adjustment request still would seem like the appropriate option if the taxpayer is a partnership, even as we go, perhaps beyond this 2020 income tax return statute of limitations. But it doesn't solve all other tax entity types.

That's the gap that continues to exist and where we sit today, the only reasonable answer at this point is that the IRS has to come forward and issue some further clarification. I've no doubt that the IRS is well aware of the issue and we'd expect to see some further communication. I know that doesn't fully solve the question that's being asked within the market other than wait and see, but unfortunately, that really is our current reality.

Walker: I guess, mainly, we're speaking here to tax practitioners, communicating that to your clients that this is a real possibility is important because what you don't want them to come back and say, hey, you never told me x, y, z. I feel like that's important.

Like you said, we at the AICPA have made them aware that this is an issue. I'm sure they know it's an issue. Hopefully, there will be some extension of the statute. I'm not sure how that actually is affected. But anyhow, for now, that's where we are.

Elanjian: April, I love the comment about the communications with clients.

In this market, and I know we're talking here as the comment was made about this income tax return dilemma that we may be faced with and likely will be is the just the misinformation about the ERC. Communication with clients so that they understand that you're here or they understand that you have the advice or can recommend someone who does, is clearly important in our role as trusted advisers to our clients.

Where we can see things go awry is when there is no communication and our clients go out and seek help from someone else, they may not have a preexisting relationship [with] and may or may not provide the right advice.

That client communication element to speak to, April, is critical.

Walker: We're going to continue to talk about amended tax returns, but we're going to talk about the OPR (Office of Professional Responsibility) guidance around professional responsibilities on claims. Definitely another conversation topic, question topic on this issue.

What is your perspective on this guidance and how practitioners might navigate this?

Elanjian: This is a matter we deal with regularly and that's from all sides. When it's the CPA, it may be the service provider or maybe an attorney. What's the burden? What's the responsibility rather is perhaps the better way to say it as relates to the tax preparer.

We recognize that the issuance of the OPR guidance or the IRS warnings and communications may prompt or require for that matter the CPAs to provide certain level of diligence. Some CPAs feel that they've been tasked with effectively performing some function of the IRS. At least they're acting in that particular manner as the last line of defense, if you will.

The unfortunate piece of this is that it's caused a significant strain in CPA and client relationships. As we're aware of numerous situations in which CPA may have refused to file an income tax return over an inability to agree on a position taken by their client pertaining to the employee retention credit and unfortunately sever certain relationships. That's certainly not the outcome any of us are looking for.

As we look at the OPR guidance, we look at the standards for tax professionals, we look at Circular 230. What it's speaking to is the reasonableness of the position taken by a taxpayer, the responsibilities of the tax preparer as it pertains to diligence and disclosures and how any associated penalties perhaps may come into play. That's really when it gets into this element of an unreasonable position. There's this process that a tax preparer they go through to determine is the position reasonable.

I think it's important to consider what we see in [Sec.] 6694, which notes that a tax preparer may rely on advice furnished by another adviser, another tax preparer, or another party, and that the tax preparer is not required to audit or examine or review the books and records, the business operations, the documents or other evidence to verify independently the information that was provided by the [3rd party]. That being said, the tax return preparer may not ignore the implications of the information on the income tax return, and they make reasonable inquiries if the information furnished appears to be incorrect or incomplete.

We're left with the understanding whether it's known or there's reasonable belief that the position taken is unreasonable or inaccurate. We need to figure that out to determine how far we are inquiring or evaluating the reasonableness of a position.

We're hearing some CPAs taking the position that if their client claimed the ERC, then April as you noted earlier, they should amend the income tax return. We know if it's claimed that there's an income tax implication, therefore, just do it. Amend the income tax return, no further questions asked. Now, the other side of the equation, we're seeing CPAs and some of them who have decided not to provide ERC services for one reason or another, now being faced with this consideration of being the ERC advisor, and assessing the taxpayer situation and effectively re-performing the eligibility analysis, which may very well lead to a different outcome for any number of reasons than what the taxpayer acted upon.

The appropriate position is likely somewhere in between the middle of those two bookends, and we're looking to comply with Circular 230 and certain relevant sections of the Internal Revenue Code as well as the [Statements on] Standards for Providing Tax Services. This really involves making reasonable inquiries pertaining to the taxpayer's position. Unless the facts and circumstances suggest that the position is unreasonable or inaccurate, you may stop there.

Given the subjectivity of the program, it's highly common for two different parties to evaluate the same taxpayer's position and reach two different conclusions. That might be informed by their approach, their knowledge of the program, perhaps their risk tolerance. But what it does not necessarily mean is that one position is reasonable and the other one is not.

As we discussed earlier, there's this lack of case law and applicable legislative history to actually know what a partial suspension is and what is an unreasonable position short of the known fraud and abuse.

Accordingly, making the appropriate level of inquiry to understand the taxpayer's position, assessing if it's reasonable, would seem to satisfy the compliance requirements without full re-performance of the analysis to formulate an independent conclusion that maybe predicated upon the documentation the taxpayer has pertaining to their position.

For example, if you're speaking with one of your clients and asking about their eligibility position for having claim the credit and all they can tell you is supply chain disruption with no further information, that likely is going to warrant some additional inquiry and further probing.

However, if taxpayers provide a narrative that articulates their position, its alignment with the program requirements, that would seem to achieve the level of due diligence that's required by the taxpayer as having a reasonable basis for the claim that's been filed.

Walker: I think [there are] no easy answers here, but a great way to think about it. Let's shift.

We've alluded to it a couple of different times throughout our conversation, but let's shift to as you're helping CPA firms, their clients and defense of actual examinations that are currently ongoing. [Justin, could you] share some of the themes you're seeing from those exams.

Elanjian: Sure. We recognize that CPA firms and law firms and certain ERC providers may not have the skills, knowledge, experience, or even the bandwidth to provide representation in the wake of an ERC claim exam.

That's been a great opportunity for us to collaborate with the trusted advisers to mutually serve their clients best interests and having the opportunity to do so as it pertains to the audits of these ERC claims has certainly provided some insights. Some of which from our perspective maybe a bit concerning, but nonetheless informative. As it relates to what can be expected and where to focus our efforts in working with clients and what types of documentation to really dive in deeper on.

I think it's important to start the conversation with the notion that the IRS Notices themselves or the Internal Revenue Services’ interpretation of the statute are not necessarily binding in nature. What is binding in nature is the statute itself, and that presents a much more broad definition of an eligible employer particularly as it relates to a full or partial suspension. If we look at the Cares Act, it states that an eligible employer is any employer for which the operation of the trade or business is fully or partially suspended during the calendar quarter due to orders from an appropriate governmental authority limiting commerce, travel or group meetings due to the coronavirus disease.

Notably, there's no mention of a more than nominal portion or more than nominal effect among the various other limiting provisions that surface in the IRS notices and most notably IRS Notice [20]21-20. That notwithstanding, we're seeing some common themes or areas of focus from the IRS exam agents that provide even a more narrow or more limited view of an eligible employer than what may be present within IRS Notice 2021-20. Again, that's to inform advisers of how they may approach situations and engage in conversations with their clients to defend their position or be prepared for defense.

In no particular order here, what we're seeing is significant emphasis on essential businesses, on government orders, the whole more than nominal concept and supporting documentation. Touch on each of these just briefly, just for some additional context.

When it comes to essential businesses, the IRS is taking a narrow approach, and particularly as it relates to essential businesses that do not operate with a non-essential component. The exam agents are hyper-focused on the fact that essential businesses, by definition, were not required to shut down.

Now, notably focused on the concept of shutdown, which is not the criteria in the statute, nor is it the criteria in the IRS guidance for being eligible. That has certainly presented some challenges for essential businesses whose trade or business operations may have been suspended by any number of factors, even though they were technically remained open for business. There's this extra level of diligence and communication that's seemingly necessary when dealing with claim exams.

As expected, the government order aspect is relevant. The IRS is requesting copies of the government orders, actual copies of the orders that were determined to be a contributing factor or the causal factor to the suspension noted by the taxpayer. In some situations, the agents are specifically requesting that they be directed to the exact section within an order. Show me the terms, show me the article, show me the subsection within the order that's being cited. We've been pulled into situations after an IDR [information document request] and a disallowance occurred, where the basis of the disallowance was because the taxpayer had provided hyperlinks to URLs where the orders existed. The agent wanted the actual orders and therefore disallowed the claim because the orders themselves and the specific sections within were not cited. That's one part of this is the substantiation of the order.

The other side of this is what is an order. We know that certain things like statements made at a press conference don't constitute an order. But what I'm talking about is the verbiage perhaps used within an order. The order uses words like recommends or encourages or something to that effect. The agent may not consider that to be a mandate, but rather a guideline. I can understand that in certain circumstances, but it certainly presents a challenge to get into that level of nuance and that level of detail for CPAs, ERC advisors, or the taxpayers themselves.

But where this further extends into some challenges is, let's take a hospital for an example, or a long-term care facility whose financially reliant on their Medicaid contracts and therefore, in turn, compliance with CMS [Center for Medicare & Medicaid Services]. The IRS is not acknowledging that the CMS is, "guidelines" were not required to be followed. They don't rise to the level of a government order and a mandate. That in and of itself can present some challenges as taxpayers who are subject to following these guidelines could lose their whole Medicaid funding, which would cripple the business if they didn't comply. There's some debate here as to whether or not that should also be considered an order.

I think the third item I mentioned was the more than nominal concept. This one is interesting for a number of reasons, despite the element of it not being present within the statute. The exam agents are very much looking for a calculation. Show me the numbers, show me the revenue, show me the employee hours. The approach is extremely formulaic. Not only that, but the application of some of the more than nominal criteria is being just simply misapplied.

When we look at the more than nominal affect language in Q&A 18 out of [IRS] Notice 2021-20, it notes that Governmental order that results in a reduction in employer's ability to provide goods or services in the normal course of the employer's business operations of not less than 10% will be deemed to have more than a nominal effect. Unlike the more than nominal portion concept, this does not suggest it needs to be a factor of revenue or employee hours. Further, it does not state that it needs to be in relation to a comparable quarter in 2019.

However, we're still seeing agents requesting a calculation for a reduction in revenue or reduction in employee hours of 10% to achieve the nominal effect criteria. That's just simply inaccurate. But nonetheless, it is something that we're continuing to see in the wake of IRS ERC claim exams.

Walker: Great. That's helpful. Helpful to you as you're walking through the steps we've talked through earlier today. What is reasonable? What is not? At least considerations here's where the IRS is coming from and then you make your own professional judgment. Justin, thank you so much. This has been super helpful for me and hopefully for our listeners. Any final thoughts as we're wrapping up today?

Elanjian: There's obviously a lot of unanswered questions and differences of opinion when it comes to the employee retention credit program and CPAs are receiving information that sends a sentiment that anyone who charges it continuous fee is bad or a substantial component of claims that have been filed that are improper. We go back to that comment made by the IRS that 95% or more of claims coming in recent months are ineligible. Probably somewhat of an overstatement. Obviously, 95% is clearly significant. Well, it's still probably not 95%, I think the intent of the message is probably not far off. It may not be that 95% or some significant percentage of claims are improper, but rather they don't contain the supporting documentation required, and in turn, therefore may be deemed as improper.

It continues to drive home this element of documentation, I think biggest takeaway of all of this is the documentation, the preparation of such, whether it's to prepare an income tax return, preparing for a claim exam, determining the withdrawal program or whether or not to file a claim. Is there a position and can it be documented and what should not occur as businesses who are rightfully entitled to the credit, second-guessing their claims, or whether or not to even submit one for fear of penalties or interest or potential financial burden that they may face or their claims be subject to exam.

At the end of the day, it's important we get back to the intent of the program, which was to provide funding to businesses who experienced challenges due to COVID and maintain their employees on payroll. We recognize that this adds more responsibilities to the CPAs as the trusted advisors to their clients, and that's where Stout is here to help and be a resource to you and providing guidance and advice to your clients to maintain the competence the clients have in you and manage your risk and their risk accordingly.

Walker: Wonderful, thank you. We will, Justin, put your information on how to best contact you in our show notes if anyone is listening and thinks I need to talk to Justin a little bit further.

In closing on these podcasts, I like to think about as Tax Section Odyssey we're taking a journey together toward a better profession. In doing so, I really like to get a glimpse of my guests, other journeys outside of when they're working on tax. Please share a page from your travel journal, Justin, either a bucket list trip or something you have on the horizon?

Elanjian: Boy, that's a tough one. I don't know that I have one on the horizon as we've had the opportunity to do some travel recently. I'll speak to the recent travel instead of the upcoming. We had the opportunity to do a two-week safari in Africa. That was absolutely outstanding. If someone hasn't gone and it's not on your bucket list, you're making a mistake. Put it on a list. It is unbelievably worth it and an experience that you will never forget.

Walker: Perfect. As we're accumulating these podcasts, I have added to my bucket list, and I think I'll have to add that as well. Thank you so much again, Justin again, this is April Walker from the AICPA Tax Section.

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