Read The Transcript Below:

Steven (00:51):

Hello everyone, and welcome to the next episode of the Retirement Tax Services podcast, Financial Professionals edition. I’m your host, Steven Jarvis, CPA, and joining me this week on the show is a fellow CPA Catherine Tindall to talk about the employee retention credit or the ERC and all of the fun that comes along with that. So Catherine, welcome to the show.

Catherine (01:10):

Thanks for having me. Fun’s the right word.

Steven (01:13):

Fun is always the right word. It’s also the old me F word related to taxes I’m allowed to say on the podcast according to my family. So we’ll stick with fun. This is such a great topic. Great topic. It’s a timely topic. It’s an important topic because I’ll give just the really quick overview because then you’re the expert and you’re going to tell us how this actually works. The ERC, the employee retention credit was one of the things that came out of Covid and it had a little bit longer of a shelf life than the PPP money, right, because that got all the attention early on. And then the ERC was another way for Congress to quickly give out money related to impacts from Covid. But unlike the PPP money, which was designed to just basically be a handout from day one, the ERC is a tax credit, which means there’s a reconciliation process to it and there’s the potential for the IRS to go back and say, no, you didn’t claim that correctly. And there can be enforcement actions related to it. And that’s what we’re in the middle of is the IRS taking this program that was thrown at them by Congress to quickly implement and now trying to sort out what the heck actually happened.

Catherine (02:18):

That is a good summary of the situation. So this credit is only applicable for business owners and people who had employees W2 employees. So for people who had contractors, it doesn’t apply. But the main problem with this program is like what you said, it’s a tax credit. So it behaves really differently from the PPP and the gist of what’s kind of gone wrong with this program is the fact that when Congress passed the legislation for it as always happens, there are a lot of gray areas when this is having to play with the rest of the tax code and the rest of the tax code is very complex and very lengthy. They had to interpret all of the rules for this program out of the existing tax code and precedent. And so what happened is this program that was originally intended to be a general aid program for employers who were impacted during the pandemic became riddled with all of these complex rules.

(03:12):

And on top of that, a lot of people aren’t aware that when you are doing tax work for people, you don’t actually have to have a CPA license or an enrolled agent license to sign a return for somebody else. There’s no regulation around who can file for these from the IRS side other than you need to file for an identification number with the IRS. And so what happened is this credit, which it’s up to $26,000 per employee, is the total cap of the program. When a lot of tax professionals approached it and they saw, oh, there’s all these sticky rules. I could see the audits a mile away. I’m not going to dig into. A lot of people decided they weren’t going to dig into it. A lot of people did go through those due diligence processes and said, no, my clients aren’t qualifying for this, that and the other.

(04:00):

It left this kind of open space where a lot of bad actors got involved and anybody who follows the IRS update pages, which I’m guessing most people are not nerdy enough to do that, they’ve been warning about this program for a long time because there’s been a lot of people where they would sell these bogus credits and tell people that they were eligible for all of this money. But then when you go back and look at the actual rules, which we can get into kind of what are the red flags of this? They don’t actually qualify for it. And how this is allowed to happen is because it takes the IRS such a long time to process. And then earlier on in this program, they were just kind of processing everything without checking it. People could get these credits back and really it’s only an IRS enforcement that can come back and say, Hey, we actually want to see your paperwork. How are you qualifying for this thing? That’s where a lot of the problems have come in.

Steven (04:53):

There’s so many thoughts that come to mind as we dive into this conversation. One is that I reinforce this to people all the time, but this is a perfect current example of the fact that I’m right, which I always like to pat myself on the back, but I tell people that just because you put it on a tax return and the IRS didn’t immediately audit you and they sent you a refund, doesn’t mean it was right. And there’s silly examples that come up at times. There were several years ago, I think it was a taxpayer in Florida who basically just wrote in, Hey, give me a 2 million refund and the IRS send ’em the refund. They went and bought cars and all these ridiculous things. And people are like, ah, that’s ridiculous. But this ERC, that’s pretty much exactly what happened. And I like that you described how this vacuum was created because again, we have the PPP money where people were more familiar with, and this also illustrates what happens between politicians talking Congress issuing a rule, and the IRS trying to implement it because let’s take the PPP for a second.

(05:50):

Congress said, Hey, there’s going to be all these things about who qualifies and how you’re impacted to be able to get the PPP money. And then they wrote actual rule and they basically just said, Hey, if you think you are impacted, we’ll give you money. And then everyone moved on and there was a ton of fraud, but no one’s really gone back and done that much about it. The difference with the ERC was that they took the time to say, this is going to be a multi-year program, and they took the time to actually write rules. And so I think from the business owner standpoint, so for advisors listening, you really need to be thinking about whether you personally applied for this program, you have employees or you have business owners with employees, and you need to go back and figure out if they did apply for this program.

(06:30):

Because I know a lot of people approach it with this vague idea of, well, yeah, I was impacted by Covid, and that’s not the way the rules were written. There were very, very specific rules about what industries did and didn’t qualify and how much you had to show that your revenue dropped off to be able to qualify for these credits. And Catherine, to your point, it was up to $26,000 per employee. So we’re talking about hundreds of thousands and millions of dollars in specific situations. Now, I’ll let you talk a little bit more about how the specific rules work. The one other thing I want to call attention to is you talked about these bad actors and who can and can’t sign a tax return, which it is a lot easier to be a tax professional than a lot of people really think. But the other thing, and this is another red flag I tell people about separate from the ERC as well, is that if you’re working with a tax professional who won’t put their name on the tax return, that’s a huge red flag because what a lot of these ERC mills did was say, Hey, we’re just going to tell you how much you can apply for and we’ll even help you fill the forms, but oh, we’re not your CPA, so go take it to someone else to put their name on the return.

(07:35):

That’s a big red flag.

Catherine (07:36):

Oh yeah, absolutely. And I think the big takeaway, the red flags, just to put this into perspective for people, you can have small businesses that applied for this, and I did the math out of somebody who got say a hundred thousand dollars. So that’s not a huge headcount if you divide that by 26 that they weren’t eligible for. If you go and figure out, okay, what’s the worst case scenario of the IRS auditing this thing? How much are they going to pay in interest? How much are they going to pay in penalties? How much are they going to pay a CPA firm to defend them in an audit? They’re going to have to pay the credit back. And then by the time I got to the end of that calculation of what the all-in cost is to fix that, it was going to be $250,000 is what we ended up at.

(08:17):

And so you’re basically running the risk if you have an erroneous claim of basically having to pay back significantly more than what you even got out of the program to begin with if you don’t address it in a timely fashion. So this is a really, potentially you’re sitting on a landmine with this thing, but I would say the big red flags because a lot of people who filed are eligible for it. Yes, that’s a great point. And if you went through a CPA, you went through somebody who knows what they’re doing with this was very cautious and it felt like a very measured process to you. It didn’t feel rushed, it felt very thorough. They had these conversations with you, they had you amend your income tax returns, all of those pieces. If it felt like that, most likely you’re probably okay. It’s just when it was a very salesy process and somebody pushing a credit on you and everybody qualifies and the numbers are really, really crazy big and there aren’t these qualifiers about IRS audits and things like that.

(09:18):

That’s when I have concerns. But I can talk about some of the big red flags that I see, and a lot of it comes down to eligibility because that’s where most of the problems happen in this program. The calculations themselves, they’re not easy, but they’re straightforward. The real questions that have difficulty are around eligibility because basically with this program it was open in 20 and it’s actually still open for 2021 for people want to go back and file for it. It’s still available, which the 21 program is the better qualification period because the 20 program is only $5,000 per employee for the year. The 21 program is up to 21 because it’s each of the three quarters you can get seven. And so it’s a quarterly test that you do for eligibility. And there’s basically two main factors. The first is if the business had revenue declines on a quarterly basis, when you compare back to 2019, if they’d hit certain thresholds, they qualify.

(10:18):

So for the person who went through the process, the person who was doing the testing should have had access to quarterly P&Ls or quarterly revenue information all the way back to 2019 and that there were declines that were happening. Now for 20, it needs to be 50%. So it’s really hard to qualify in 20 because a lot of business, that’s a really high figure to have to hit a 50% revenue decline. But in 21, that lightened up a lot and it’s only 20%, so that’s a lot easier to hit for 21. And with the revenue decline testing, it’s a fairly straightforward test, and we can post either in the show notes or in resources somewhere. I have a tool that you can go through doing that test because fairly routine to at least kind of take it for a spin. And that’s from any cause whatsoever.

(11:05):

So it doesn’t have to be because of Covid. I’ve had people who were winding down their businesses or there were other reasons why their revenues declined. It’s just a pure, did your revenues decline? Yes or no? And that’s the first test. I should also say, a lot of people will look at that and say, oh, well my expenses went up or a segment of my revenues went down. Those kinds of things won’t be qualifying. It’s just a pure, what was your quarterly revenue? Did it go down compared to 2019? If yes, did it go down enough? If yes, you qualify for that quarter. Now the other way that businesses qualify, and then this is where all of the issues have come in with the bad actors is businesses and nonprofits also can qualify for this program if they’re employers. So if you do any advisory work or you’re on a board of a nonprofit, it’s also good to check in with them because they were actually a very vulnerable population to this because a lot of them don’t have established relationships with tax professionals.

(12:01):

So the second test has to do with your operations being restricted by government mandate orders in a very particular way. And so the key pieces that as a lay person approaching this that you want to keep in mind is the first, the IRS wants to see a copy of the government mandate order that was restricting you. For most people, that’s going to be governor’s orders. Some places in the south it’s going to be county orders or city orders. If you’re in a metro area, it’ll be things like that where a governmental order came in and the organization had to comply with it, and by complying with it, at least 10% of their normal operations were disrupted as a direct effect from that government order. So what does this look like in examples? Common one, restaurants, right? Governor order X came out March 13th, all restaurants closed after a certain amount of time, they issue a new order and say, okay, your restaurant can open at 50% capacity.

(13:06):

That’s more than a 10% impact. So that time period’s likely to qualify, but those are the kind of scenarios that are going to qualify. And so things that are indirect effects of government orders like drops in customer demand or people were afraid to come to your place of business or employees were staying home or your employees went on unemployment because a lot of people had that happen, those kinds of things aren’t going to be qualifying. You have to have an actual government order and that the order itself was triggering the disruption in the business or a partial shutdown of the business, and you have to be able to tie those things together. So in practical terms, when you’re talking to organizations or businesses that you work with, the real question is around what was used for those disruptions? Was it just general things? Did they just have you fill out a questionnaire with some narrative? What did they give you for source materials? Did they ask for any data showing how your operations were impacted or was it all just tell us what happened, kind of a scenario. So those are kind of the places where people fall off the most is really those eligibility questions.

Steven (14:22):

I definitely appreciate you going into the detail there. I think that’s probably the first time that a lot of people are hearing how that actually worked. I do want to reinforce, you did a great job highlighting it is this was a totally valid program. It continues to be a valid program. Just because you have a client who took ERC money doesn’t mean they committed fraud and they need to be concerned. But it is worth going back and asking these questions because the IRS tends to be slow, but they don’t let these things go. And so now we’re in the middle of the IRS figuring out how they’re going to enforce this. So this is getting a ton of scrutiny. While the program hasn’t technically expired yet, the IRS currently has a moratorium on processing these claims. And so even though by all accounts, it seems like there is rampant fraud in this program, and we know that the IRS has likely already given away millions if not billions of dollars that they shouldn’t have.

(15:12):

You also still have people who have legitimate claims who can’t get their claims processed because the IRS isn’t sure what to do next with this. Catherine, one of the things that’s fascinating to me because the IRS does not do this very often, but the IRS actually opened up a voluntary repayment program for this credit where they’re basically saying, Hey, if you think that you didn’t actually qualify, you can go back and repay 80% of the credit you received and it’s over. We’re not going to go into it further than that. You don’t have to go back and amend this stuff. It’s done. Closed case with the caveat of the IRS does require that in addition to you repaying 80%, you let them know who helped you file the claim to begin with. And I appreciate that the IRS has taking this approach. They are trying to go after these bad actors that you’re talking about who were going around pressuring people into doing this stuff.

Catherine (16:05):

Oh yeah, absolutely. And that program you’re describing, so that ended back in March, but they keep hinting that they’re going to reopen it again. So we should know potentially by the time this is airing, we might know that that program’s open again because for them, so just to put some numbers in perspective, they’ve paid out over 230 billion in this program. It was originally budgeted to cost 80 billion, so a little over budget and the IRS with this voluntary disclosure program. And in addition to that, they also created a program for withdrawing claims. So a lot of people who have been caught in the processing moratorium and then they go back and look at their paperwork and realize that they’re not actually eligible for this. You can withdraw your claim and the IRS won’t basically, they’ll just take it off the processing line and you’re done. You don’t really have to do anything with that.

(16:57):

So between those two programs, they’ve recovered over a billion dollars, which out of two 30 is not very impressive relatively. But those two, the VDP programs likely to be opened up again in the future I think just based on their hinting. But even if not, there are ways to correct bad filings to get back into compliance before you have an IRS issue, and especially for what’ll be relevant in conversations and what can bring value is right now, from what I see in the field, they’re going to be scrutinizing the unprocessed claims, I think a lot more harshly than the already processed claims just because it’s much easier for them to prevent a bad payment going out at this point than it is for them to try to claw back funds. And I think they finally, last summer when the moratorium actually started a little earlier than September, they just didn’t make it public, but once they finally realized, we need to stop this, the focus has now really shifted on those unprocessed claims and they’ve got about a million and a half returns that are stuck in that unprocessed state.

(18:01):

So that might be the real question to have with people on top of what did you get what happened? And having them make sure that they’re in a good position from that for a liability perspective, but especially for claims that haven’t been processed yet, there’s going to be a lot more scrutiny on those, and because they haven’t been paid out yet, it’s a lot easier to just correct them now than wait for an IRS IDR to show up on your doorstep and have to go through that whole process where now you have an agent looking at things.

Steven (18:28):

Yeah, that’s not going to be any fun and almost guaranteed, especially if you were pushing to doing this with one of these ERC mills that didn’t put their name on the return. They’re not going to be there to support you through the process. They’re going to disappear into the woodwork.

Catherine (18:40):

Which we’ve already seen.

Steven (18:42):

Yes, yes, we definitely have, and again, it’s not that this isn’t a valid program. Probably a year and a half or two years ago we talked about this podcast. I mean, it’s a program that is available. It needs to be intentionally scrutinized like any other tax plan strategy, so I always want to make sure that we’re giving our audience things that they can do, and so financial advisors listening to this, they’re not going to become ERC experts themselves, but we’ve talked about that. Really, you need to be looking at whether it’s you, yourself, that you have employees or you’re looking at business owner clients who have employees. So that’s how we’re going to start narrowing this down of people that would be good to be asking questions. Also, again, Catherine, I’ll give you a chance in a second to raise any other things that people should be on the lookout for, but as you go down this route with clients, I would strongly encourage that you’re definitely asking the questions, and let’s start open-minded and curious.

(19:32):

Let’s not assume that every person is fraudulent, that every person’s CPA did this fraudulently. The last thing you want to do as an advisor is go freak out all of your clients and get them thinking that they’ve all committed fraud and their CPAs are terrible. That’s a great way to ruin a lot of relationships, but it’s worth asking those questions of who did you work with? Was this your regular CPA that helped you do this, or was this somebody else who came in and pressured you into filing for this claim? Have you received money? Do you have an open claim? These are things that you can provide a lot of value to your clients by helping them get ahead of this or at least be aware of what’s coming as opposed to them being shocked when they get one of these letters. Because Catherine, the joys of the internet and social media, I still have business owners reaching out to me asking if they can go ahead and submit a claim because they just saw a TikTok on this great opportunity and they have no clue that the IRS is coming after this, that there’s a voluntary disclosure program that there was back in March.

(20:26):

They don’t know any of the rest. All they heard is, Hey, there might be free money,

Catherine (20:29):

Which that’s the easiest thing to sell in the world, right?

Steven (20:33):

Free money. Yeah, of course.

Catherine (20:34):

Yeah, and I would say for practical steps, something that can be a nice conversation opener is that the 21 program is still open. And so sometimes the question is, what happened and could you still qualify for more? Because for some people, a very common rule that I see missed is that there’s basically this tag along that happens in the revenue testing that a lot of practitioners miss, which triggers eligibility for two quarters instead of one. And so you can, I think, approach it with that kind of positive attitude of like, well, let’s reassess this. It is still open, it is scrutinized by the IRS, but especially if you’re qualifying with the revenue declines, that’s very easy to substantiate, right? Yeah. It’s just what’s showing up on your P&Ls. Do you follow basic good bookkeeping practices in your business, right? That’s really all we’re looking for.

(21:28):

So it is an opportunity to have that conversation with people and at least because you’re not coming in as, oh, I’m the expert on this and you don’t qualify, and this is fraud, versus, Hey, you’re a small business. This is probably the biggest tax credit opportunity that’s ever going to happen to your business. And if it was like a 10 minute process with your payroll provider, maybe that’s worth a little more scrutiny, whether it was good or whether it was bad. When something’s that momentous, it’s usually worth having at least a couple of sets of eyes on it because even for a small business when you’re talking about you get into six figures so quickly, even with a headcount of under 10 employees depending on how highly compensated they are, so it’s worth at least just having that conversation. And a lot of people didn’t take advantage of the program as much as they could have too.

(22:22):

So that’s an area for opportunity, especially if the tax professional involved wasn’t very well versed in it or the client just got kind of juggled around. But those would be the main pieces that I would recommend. You can definitely keep it as a positive conversation still, and I think the IRS is, they have been kind of putting off this scare mongering attitude out to the profession, but the rules are, they’re not easy, but they are, I think, straightforward at this point in everything you can reduce to quantitative testing and you can apply for this program and not be afraid for people who are legitimate filers. You don’t really have anything to be afraid of. If you followed all the substantiating document requirements and you’ve got your paperwork in order and you worked with somebody credentialed and experienced, you’ve nothing to worry about. It’s just going to take time. But for people where that wasn’t the case, it’s definitely worth doing a second look and seeing what happened and do we need to return some of this money or was what was filed correct that we’re waiting for, and should we try to get this fixed before the IRS comes in and does a claim denial? If we can correct it proactively.

Steven (23:38):

I don’t want to oversimplify what I’m about to say because this is certainly a complex issue, but at the end of the day, it really comes back to all the other tax planning that we do. If we worked with a qualified professional and we made sure we had documentation to support what we’re doing and we followed the rules that the IRS has outlined them, it might take time. To your point, this one might be a little bit messier than others, but at the end of the day, we don’t have anything to worry about. We’re going to follow the rules as they’re presented. We’re going to take advantage of the choices available to us and we’re going to move on. So I really appreciate how you summarized that there at the end, because the fact that there are bad actors and that the IRS is scrutinizing this more heavily doesn’t mean we should just ignore it altogether. And at the end of the day, even though there’s a little bit more scrutiny, it comes down to the same concepts. Let’s not make an enemy out of the IRS. Let’s do things that we can sit down with a straight face and support if the IRS were to ask. But at the end of the day, the way we get ahead on tax planning is by understanding the choices available to us and proactively making choices that we can document.

Catherine (24:38):

Absolutely. No, that is exactly the case with this program, and I think for a lot of people, as long as you have that conversation and that they know kind of the full risk of what they’re getting themselves into, even with a legitimate claim, most of the time it’s really worth it because even if you do have to do some more digging, there’s some waiting, et cetera, it is a really great program for people who can qualify for it. So it’s well worth taking the extra time to look at it and see where do people stand with it, because even though we’re several years after the initial enactment of this, because it’s a tax credit, you’ve got that longer statute of limitations barring there being legislation, which there’s been proposed legislation to end the program early, it’s still an active opportunity. It’s definitely something where it needs that due attention.

Steven (25:27):

Yeah, absolutely. Catherine, as we talked through this, really, we’ve been focused on helping advisors identify who might need a follow up questions and maybe some exploration here, which that’s certainly in my mind for people listening. That’s the biggest action item out of this podcast is look at your client base. If you’re working with business owners who have employees, it is worth taking the time to at least have these conversations to make sure that they’ve talked to someone qualified who’s going to help ’em explore this. Catherine, for listeners who end up with clients in situations where they might need help unwinding or really diving deep to figure out if this was done correctly, talk about the resources that you offer. How can people reach out to you directly? This is something that you personally do, and then maybe more broadly talk about what people should be looking for to make sure that they’re working with a qualified professional this time around and not just getting stuck in this perpetual loop of working with people who aren’t really looking out for their best interest.

Catherine (26:21):

Yeah, I would say so. For our firm, we’re a CPA firm, and besides doing this controversy work with the employee retention credit program, we have a niche with financial advisors doing tax work for them as their tax professional. And I would say that’s a good thing to look out for that the person who’s doing this work should have a specialty in tax to begin with. You’re going to want to work with somebody where they deal with other issues besides this program and that their approach into this program, they either do other tax credits and incentives and they have the kind of professional background that would make sense. Their business didn’t just appear mid pandemic and it’s one 800 ERC. That’s going to be a little more sketchy in my book than a CPA firm or a law firm that specializes in tax issues, not just ERC, those sorts of things, but this is something our firm does where we’ll take a look at claims that were filed and see what’s going on with it, right?

(27:27):

You want to get yourself into that Goldilocks position with the IRS of not having claimed too much and then not having claimed too little if that’s what you want. Because another piece of this is it’s an optional program. You don’t have to do it. And for clients who are really concerned about it or if they’re in a gray area and they can’t get comfortable with it, especially for claims that haven’t been processed yet, you don’t have to admit to the IRS that your claim is bad in order to withdraw it. You can decide that you just don’t want to be a part of this anymore, and that’s totally acceptable. But getting yourself into a position where you know what’s going on, and that’s something that our firm does for people. We actually work largely with other CPA firms doing this for them because it’s such a specialized issue.

(28:09):

And in particular with the IRS audits, it’s become very specialized. But I would say if you work with a licensed professional who has a lot of familiarity with the program, typically if you’re working with, if the tax professional involved is a much smaller practice, it’s more likely that they might be struggling with this program unless they did a lot of it. If the person worked with a larger CPA firm where there was somebody kind of in charge of this program when it came out, that’s a higher likelihood that it’s probably fine. But another area that I would also just caution people to watch out for is a lot of payroll providers got involved in this program and they did file a lot of them, and even some very big ones that I’ve had to clean up did basically these filings off of client questionnaires and on the questionnaires, the clients basically were the ones saying, we’re attesting that we think we’re eligible for this program.

(29:00):

Which in my opinion, as a tax professional, a client doesn’t have enough information about how this works to make that attestation. That’s something that the tax professional needs to determine. And so a lot of these payroll companies push that liability onto the client who wasn’t qualified to make that call. So that’s another really common problem that I see. It really should have been somebody with a background in taxation issues, a licensed person, and you’ll be able to tell, because if you just ask for a copy, if you have this kind of relationship with the organization, a copy of the 941Xs that were filed for the amendments and see who signed that and then find that person on LinkedIn or Google them and see who is this person that signed this are an actual tax professional. I had one cleanup case come to me where it was an over claim of over a million dollars and it was a small organization. And when I googled the name of the person who signed the return because he actually signed the return, he was a real estate attorney, had no experience in taxation, was trying to redirect the refund to himself and just all this craziness. So that’s actually a good place to start like, Hey, if you want me to take a quick look, who is this person and see who they were, are they licensed? Are they even from tax world? Who was it? That can be a good place to start.

Steven (30:18):

That’s a great recommendation. We always talk about getting the tax return every single year for this credit. That’s this great distinction we didn’t make was that this was technically a payroll tax credit. And so the form 941 is the quarterly payroll filing and the 941x is how it was amended to go back and claim this credit. So that’s a great recommendation to get a real document to be able to see who had filed it. Catherine, thanks so much for coming on the show and sharing your expertise. Just real quick, tell us again the name of the firm you work at and then best way for people to reach out to you.

Catherine (30:44):

Yeah, so my firm is Dominion Enterprise Services. We’re a CPA firm specializing in tax advisory for financial advisors. And then we also do this controversy work with the employer retention credit. You can visit our website and I’m also very active on LinkedIn with posting updates around what’s going on in this program in particular with what the IRS is releasing for information and things that we’re seeing with people’s audits and those sorts of things. So those are both two great ways to get connected.

Steven (31:12):

Awesome. Catherine, thanks you again so much. And to everyone listening, thanks for being here. Until next time, good luck out there and remember to tip your server, not the IRS!