The availability of Employee Retention Credits (ERCs) during the height of the COVID-19 pandemic — particularly the ability to claim advance payments of the credits — played a critical role in keeping many not-for-profit organizations afloat. Now, however, the IRS has begun to subject some employers that claimed ERCs to audits. Given the extended five-year statute of limitations for such audits, not-for-profit organizations that claimed the credits need to be prepared, should the IRS come calling.
ERC IN A NUTSHELL
The ERC is a refundable tax credit intended for businesses, including not-for-profits, that 1) continued paying employees while they were shut down due to the pandemic or 2) suffered significant declines in gross receipts from March 13, 2020 to September 30, 2021. The 2021 credit generally is worth up to $7,000 per qualifying employee per quarter and up to $5,000 per qualifying employee per year in 2020, and its refundable nature makes it valuable for not-for-profits and businesses alike.
Specifically, an eligible employer must have:
- Sustained a full or partial suspension of operations because of orders from a governmental authority that limited commerce, travel or group meetings due to COVID-19 during 2020 or the first three quarters of 2021; or
- Experienced a significant decline in gross receipts during 2020 or a decline in gross receipts in the first three quarters of 2021.
Importantly, for any quarter, the ERC could not be claimed on wages that were reported as payroll costs in obtaining Paycheck Protection Program (PPP) loan forgiveness or that were used to claim certain other tax credits.
Related Read: IRS Issues ERC Guidance as Congress Mulls Early Termination
IRS SCRUTINY
It is worth noting that being selected for an audit does not mean that your organization did anything wrong. However, if you did claim the ERC improperly, you will likely be required to repay the credit, as well as penalties and interest.
The ERC did come with several potential tripwires for employers. For example, the IRS may look closely at your eligibility for the credit (including your calculation of your average number of full-time employees in 2019 and subsequent quarters), determination of gross receipts, calculation of the credit amount and application of the complicated aggregation rules (if applicable).
Now is the time to review your ERC analyses and ensure you have all assumptions and related supporting information documented. You are required to maintain adequate documentation for at least four years after the related employment taxes became due or were paid, whichever was later. Documentation may include:
- Payroll journals;
- Health plan expenses;
- Tax forms;
- Employee rosters;
- Copies of governmental suspension orders;
- Records showing declines in gross receipts for each relevant quarter;
- Documents related to PPP loan forgiveness and allocation of wages between ERC and PPP wages; and
- Federal employment tax returns.
Do not wait to receive an examination notice from the IRS. Make sure you have the proper documentation now.
Related Read: Businesses Provided a Lifeline: CAA Enhances PPP Loans and Extends Employee Retention Credit
FINAL WORD OF CAUTION
If you relied on outside companies when claiming the ERC, do not assume you are on solid ground. The IRS has warned employers to be wary of companies that charged large upfront fees or fees based on the amount of the refund, or that encouraged ineligible organizations to claim the ERC. The IRS alert highlights the importance of working with experienced and trusted tax experts. Please reach out to your ORBA advisor for any questions regarding ERC.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
