In July 2023, the  Internal Revenue Service (IRS) released an updated Frequently Asked Questions (FAQs) resource on the Employee Retention Credit (ERC) that adds clarity and definition to the complex eligibility requirements of this COVID-era tax credit program for businesses and employers. Especially notable sections included greater detail on ERC scams, documentation for audits, supply chain disruption claims, and the resolution of the ERC claim backlog. Below, we summarize key areas in the updated FAQs that will be of interest to LeadingAge members.

This high-level summary offers key clarifications, definitions, or expanded sections from the updated IRS ERC FAQs by topical area. For more information on the ERC and its applicability to LeadingAge members, we also offer these expert-led webinars, FAQs, and resources.

Aggregation Rule

The FAQs update references a notice that was issued to add clarity to the aggregation rule and the calculation of eligible wages. The internal FAQs that are built-in to this notice do offer some, albeit marginal, additional guidance.

One such example is: “Under section 52(a), corporate taxpayers that are members of a controlled group of corporations are treated as a single employer. A controlled group of corporations may be either a parent-subsidiary controlled group, a brother-sister controlled group, or a combined group of corporations.¹³ The section 52(b) aggregation rules apply to partnerships, trusts, estates, corporations, or sole proprietorships in trades or businesses under common control. Under this rule, entities are treated as a single employer if they are under common control applying rules similar to the parent-subsidiary or brother-sister controlled group rules or the rules for a combined group of corporations.” Of course, the calculation “eligible wages” paid to employees whose employers are members of an aggregated group is still subject to the full time employee (FTE) requirements as defined, separately, for 2020 and 2021; this comparison chart may be helpful to determine an aggregated organization’s eligibility.

Audit/ Repayment of Funds Received

The IRS is monitoring fraudulent claims and activities by “ERC Mills” that falsely endorse receipt of the ERC by unsuspecting businesses or organizations, and has posted a listing of warning signs to identify scams and overly aggressive ERC marketing campaigns. The IRS reminded “anyone who improperly claims the ERC that they must pay it back, possibly with penalties and interest. A business or tax-exempt group could find itself in a much worse cash position if it must pay back the credit than if the credit was never claimed in the first place.”

A short YouTube video helps draw attention to this issue.

Documentation/ Recording Keeping

The updated FAQs include a helpful list of documents that organizations should maintain during and after their ERC claim. These include documents that show:

• business operations were suspended, including the specific government order;
• you experienced the required decline in gross receipts;
• specific employees who received qualified wages and in what amounts;
• you paid qualified wages only to employees who were not providing services, if you are a large eligible employer;
• how you allocated qualified health plan expenses;
• your relationship to other businesses or entities and how it affects your ERC claim (see aggregation rules in Notice 2021-20, Part III, Section B);
• any completed Forms 7200 that you submitted to the IRS; and
• any completed federal employment and income tax returns related to your claim for ERC.

General Eligibility

The IRS ERC website now offers a helpful Eligibility Chart that attempts to simplify the varies qualifying criteria for the ERC. The updated FAQs also lead off with several questions around eligibility, and the IRS clearly lists those who are not eligible: individual taxpayers who are not business owners; employees; retirees; people who do not have employees; household employers; employers that didn’t pay wages to employees during the qualifying time periods; employers who experienced supply chain disruptions but did not experience a full or partial suspension of operations by a qualifying order; and government agencies.

Additionally, it is important to note that a full or partial shutdown due to a supply chain disruption does not automatically qualify an organization for the ERC. In order to claim the ERC due to a supply chain disruption, three criteria must be met:

• the supplier must have been impacted by a government order, related to COVID, that prevented the delivery of needed supplies;
• an alternate supplier could not be found that could provide the needed supplies; and
• that lack of needed supplies is what directly caused your business or organization to experience a full or partial shutdown, and/or requisite gross loss in revenues.

More detail, including examples, is provided in this legal memorandum from the IRS.

Government Order Test

The updated FAQs offer greater clarity on what constitutes a government order, including a list of examples. The IRS states that recommendations, statements, or guidance issued by government agencies are not government orders. Even with a government order in place, the employer must prove the order was related to COVID-19 and that it caused business to be fully or partially suspended.

There is a separate list of examples of businesses that do qualify under a full or partial shutdown. Examples of those who do not qualify include: If all employees were able to telework during the pandemic and business continued to operate; if customers were affected by a stay-at-home order but no orders applied to business operations; or if the business was voluntarily closed or hours of operation were reduced.

Receipt of ERC Funds

The IRS issued a press release from the Commissioner that stated the IRS is diligently working to reduce and/or eliminate the ERC claims backlog that has stymied the refunds of many businesses and organizations.  Check the current status of the ERC processing backlog here.

Scams and ERC Mills

The updated FAQs have an expanded section on Scams and ERC Mills that attempt to manipulate unsuspecting businesses, organizations, or individuals into fraudulently claiming ERC funds – while collecting a sizable fee extracted from the expected credit refund.

Many LeadingAge members have reported experiencing precisely the tactics and activities by scammers that the IRS outlines in two helpful lists, such as:

• unsolicited calls or advertisements mentioning an easy application process or offering a short eligibility checklist
• fees based on a percentage of the refund amount of ERC claimed
• preparers refusing to sign the ERC return being filed by the business
• exposing just the taxpayer claiming the credit to risk
• aggressive claims from the promoter that the business receiving the solicitation qualifies before any discussion of the group’s tax situation

The updated FAQs offer similar advice to organizations that LeadingAge’s own expert panels have shared with members regarding how to protect your organization from scams. Work with a trusted tax expert that already knows your organization and request a detailed worksheet from the ERC firm that outlines your organization’s specific eligibility and that provides the precise government orders (i.e., that the firm claims makes your organization eligible, doing your own intensive review to be sure your organization legitimately qualifies for the ERC).

If you suspect that an ERC firm is engaged in fraudulent claims, you can submit this this form to alert the IRS to the matter.