Ryan J. McDonell, CPA, MSA
Tax Manager

The Employee Retention Credit (ERC) is still very important for many American businesses that continue to take advantage of the COVID-19-era tax break. However, recent events have caused the IRS to halt the processing of new claims and to slow down the processing of claims already in the system. Additionally, recently released internal IRS memos shed light on several eligibility issues including the availability of the ERC for federal credit unions.

The ERC is a refundable payroll tax credit created as part of the CARES Act to provide relief to employers that continued to pay employees during the COVID-19 pandemic. Employers may qualify for the credit if they experienced a significant decline in gross receipts during the pandemic, or if operations were suspended due to a governmental order. The ERC is available for wages paid during 2020 and 2021, and qualified employers may still claim the ERC by filing amended employment tax returns. The ERC is complex and requires careful analysis to determine eligibility. Employers should work with trusted tax professionals to avoid predatory ERC promoters that may file erroneous claims in exchange for a percentage of the credit proceeds.

Moratorium on new credit claims

On September 14, 2023, the IRS announced a moratorium on new ERC claims through the end of 2023. The IRS explained that the purpose of the moratorium was to both protect small businesses from predatory credit promoters, and to allow the U.S. Justice Department to pursue fraudulent claims. This action was prompted by an influx of new ERC claims by employers that may be ineligible for the credit. The IRS and tax professional community have voiced concern over employers scammed by aggressive credit promoters and marketing. ERC claims submitted prior to the moratorium announcement will still be processed but with increased processing times. Employers that legitimately qualify for the ERC who have not filed credit claims may still submit for the credit during the moratorium period. However, claims filed during the moratorium will not be processed until the moratorium ends.

Withdrawal process for existing credit claims

In October, the IRS announced a withdrawal process for employers that have filed ERC claims and are concerned about the accuracy or legitimacy of the claims. ERC claims withdrawn through this new process will be treated as if they were never filed, and the IRS will not impose penalties or interest. The withdrawal process is available to employers that have not received their ERC refund or for employers that have received a refund check and have not cashed or deposited it. Employers that have already cashed or deposited their ERC refunds who wish to return their funds may file an adjusted return to repay the credit. The IRS will also provide additional guidance for employers who were misled into claiming the ERC and have already received payment. While no end date for the withdrawal process has been announced so far, the IRS has signaled that this program will eventually sunset, possibly as early as the end of the moratorium.

IRS internal memos and advice

Several IRS memos and counsel advice regarding the ERC have been made public. While these documents may not be used or cited as precedent, they offer employers valuable insight into the IRS discussion on various matters about the ERC.

Supply chain disruptions and suspension of operations

Generic Legal Advice Memorandum AM 2023-005, released July 21, 2023 considers the interplay between supply chain issues and businesses qualifying for the ERC based on a suspension of operations. The memo reiterates the requirements for employers claiming ERC eligibility based on government orders and provides several examples that discuss whether an employer has experienced a supply-side suspension.

Eligibility of federal credit unions to claim ERC

Chief Counsel Advice number 202333001, released August 18, 2023 discusses eligibility of federal credit unions (FCUs) for the ERC. The advice concludes that FCUs may not claim the ERC during the 2020 calendar year because they are considered instrumentalities of the U.S. government, prohibited from claiming the credit in 2020 pursuant to the CARES Act. The advice concludes that FCUs are allowed to claim the ERC during the 2021 calendar year during quarters which they qualify under the gross receipts or government order tests, or as a recovery startup business. During 2021, the CARES Act prohibition on government instrumentalities does not apply to organizations described in Section 501(c)(1) of the Internal Revenue Code, exempt from tax under Section 501(a), which includes FCUs.

OSHA orders and suspension of operations

Generic Legal Advice Memorandum AM 2023-07, released November 3, 2023 discusses whether communications from OSHA are government orders that may qualify an employer for the ERC under the suspension of operations test. The memo considers the ordinary meaning of an “order” and the use of the term “order” under OSHA’s statutory authority under the OSH Act. The memo generally concludes that OSHA communications are not sufficient to meet the requirements of government orders required for the suspension of operations ERC test. The memo provides examples of OSHA orders and ERC eligibility.

If you have questions about your company’s eligibility for the ERC, or about a pending claim, contact your G.T. Reilly advisor.