Employee Retention Credits Archives - CAMICO

Risk Management Aspects of the IRS’s Second ERC Voluntary Disclosure Program and the ERC Withdrawal Option

Amber — Tue, 08 Oct 2024 20:46:07 +0000

On August 15, 2024, the IRS announced a second Employee Retention Credit Voluntary Disclosure Program (“ERC-VDP”) for the benefit of businesses and tax-exempt organizations that erroneously claimed the Employee Retention Credit (“ERC”) for 2021 and have received a credit or refund prior to August 15, 2024. The initial Voluntary Disclosure Program (“VDP”) for the 2020 and 2021 years sunset on March 22, 2024. The second ERC-VDP is open until November 22, 2024, and is only available for ERC claims filed for tax periods in 2021 and for which the taxpayer received an ERC refund prior to August 15, 2024.

A notable difference in terms between the two programs is that the first ERC-VDP allowed taxpayers to repay only 80% of their erroneously received ERC refunds, whereas this second ERC-VDP requires taxpayers to repay 85% of their erroneously received ERC refunds.

It is important to note that in addition to the second ERC-VDP, the ERC Withdrawal option that the IRS rolled out in October 2023 is still available and allows certain taxpayers that filed an ERC claim to withdraw their claims without penalty. CPA firms who have clients that may (or should) be questioning whether they were, in fact, eligible for the ERC should advise these taxpayers to consider the IRS ERC-VDP or the withdrawal option if they meet the respective program eligibility criteria. Although in-depth analyses are beyond the scope of this article, below are highlights for your reference.

Second ERC Voluntary Disclosure Program

The IRS introduced the second ERC-VDP to assist taxpayers who have erroneously claimed the ERC for 2021 tax periods. This program provides an opportunity for businesses and tax-exempt organizations to rectify their errors and avoid severe consequences. The program is specifically for those who have already received the ERC and wish to avoid penalties by voluntarily repaying a portion of it. The program, which remains available until November 22, 2024, offers not only a pathway to compliance but also substantial financial relief.

One of the most attractive features of the ERC-VDP is the reduced repayment obligation. Participants are required to repay only 85% of the ERC they received, effectively granting them a 15% reduction. This can significantly alleviate financial burdens, particularly businesses and tax-exempt organizations facing economic difficulties. Additionally, the program eliminates the need to amend income tax returns to reduce wage expense by any of the claimed ERC. Furthermore, the waiver of any interest accrued on ERC refunds provides additional financial relief.

However, it’s crucial to remember that the ERC-VDP is not a universal amnesty program. Eligibility hinges on specific conditions. Taxpayers must have claimed and received the ERC for 2021, currently believe they were not entitled to it, and not be under any IRS examination or criminal investigation. Additionally, the IRS must not have taken any steps to reverse the taxpayer’s ERC. It’s also important to note that those who used third-party payers (employers that claimed the ERC on an employment tax return filed under the third-party payer’s Employer Identification Number) to file their returns or claim the ERC cannot apply directly to the program and must work through the third-party payer.

The application process involves submitting a complete application package by following the instructions on Form 15434 (Application for ERC Voluntary Disclosure Program). The application along with supporting materials must be submitted through the IRS Document Upload Tool by the November 22, 2024 deadline. The IRS will then thoroughly review the application and inform the taxpayer of its decision. If accepted, a closing agreement will be issued, and the taxpayer must fulfill their repayment obligation to avoid penalties and interest.

The ERC-VDP provides a valuable opportunity for eligible taxpayers to correct their mistakes, but it’s important to understand its limitations. It does not protect those who willfully or fraudulently claimed the ERC. Such cases remain subject to potential criminal investigation and prosecution. For taxpayers who genuinely made errors, the program offers a fair and reasonable path to compliance. Taxpayers with criminal concerns should be strongly encouraged to seek assistance from qualified legal counsel. For more details regarding the program and application process, including specific eligibility requirements, refer to the frequently asked questions available on the IRS website: Frequently asked questions about the second Employee Retention Credit Voluntary Disclosure Program | Internal Revenue Service (irs.gov).

ERC Withdrawal Option

To help protect taxpayers from penalties that could be imposed on ineligible claims, the IRS withdrawal option permits taxpayers that filed an ERC claim for which they were ineligible and have not yet received a refund (or who have received an ERC refund check but have not yet cashed or deposited it) withdraw their claims and avoid the imposition of interest and penalties. This option is for those who have not yet received a refund and wish to avoid potential penalties associated with an ineligible claim.

Taxpayers opting to withdraw their ERC claim through this method are requesting the IRS to disregard the entire adjusted employment tax return. Claims that are withdrawn will be treated as if they were never filed, and the IRS will not assess penalties or interest. Taxpayers who utilize the withdrawal process will receive a letter from the IRS about whether their request was accepted or rejected. This method does not apply to taxpayers who have made additional adjustments on a claim or only wish to reduce the amount of their claim. Such taxpayers will need to file an adjusted employment tax return on Form 941-X.

Generally, withdrawn claims are treated as if they were never filed. However, taxpayers found to have willfully filed a fraudulent claim, and those who assisted or conspired to do so, remain subject to criminal investigation and prosecution.

Risk Management Guidance

CAMICO strongly recommends that firms inform and advise clients in writing of the availability of:
- - The Voluntary Disclosure Program that will sunset on November 22, 2024, and
  - The option to withdraw their ERC claim submissions.

CAMICO has a client notification template for this purpose that is available on the Members-Only Site’s Tax Resource Center.

Retain a list of all clients to whom you send the notification.
Determine your firm’s willingness, knowledge, expertise, and risk tolerance to take on assisting eligible clients with either or both programs, and if you decide to do so, assess what services you are willing to offer and how best to deliver those services. If you determine that your firm will not render such services, make it clear in your client notification that you are advising firms to consult with a qualified professional.
If requested to assist a client with either or both programs:
- - Assess whether the specific client needs may require a level of knowledge and expertise that would be better suited for another qualified professional. For example, consider whether the client would benefit from having these services receive attorney-client privilege by working directly with or having these services under the umbrella of a qualified tax attorney. Also, the client may be better served by having the original preparer/processor assist with the withdrawal process or application for the ERC-VDP.
If agreeing to assist a client with a withdrawal request or application to the ERC-VDP:
- - Obtain a signed stand-alone engagement letter that clarifies the limited services the firm is rendering and contains appropriate disclaimer language.
  - In addition, obtain written client representations acknowledging that management is responsible for the accuracy and completeness of the information they provide to the firm for purposes of assisting with the withdrawal request or assisting with completing the application for the VDP, and acknowledging their understanding that the firm is not providing any services to assist with determining eligibility for the ERC as part of this limited service.
  - CAMICO templates for both the engagement letter and management representation letter are available on the Members-Only Site’s Tax Resource Center.

Additional Information

IRS Resources

IR-2024-212 IRS Reopens Voluntary Disclosure Program (August 2024)

IR-2024-213 IRS provides details of second Employee Retention Credit Voluntary Disclosure Program; program for improper claims open through Nov. 22 | Internal Revenue Service (August 2024)

IR-2023-193 Withdrawal process for ERC claims (October 2023)

AICPA Resources

AICPA Employee Retention Credit Resource Center

Employee Retention Credit Client Documentation Memo Template [available to AICPA Tax Section members] is a customizable MS Word template designed to document discussions with clients regarding their eligibility for the credit, the conclusion as to their eligibility, and the basis for those conclusions; as well as a checklist of cautionary communications describing potential consequences including the option to file Form 14242, Report Suspected Abusive Tax Promotions or Preparers.

CAMICO Resources

CAMICO has developed risk management resources on this topic, and you can access them by logging in to CAMICO’s Members-Only Site under the Tax Resource Center.

CAMICO policyholders with questions regarding this communication or other risk management questions should contact the Loss Prevention department at lp@camico.com or call our advice hotline at 800.652.1772 and ask to speak with a Loss Prevention Specialist.

The post Risk Management Aspects of the IRS’s Second ERC Voluntary Disclosure Program and the ERC Withdrawal Option appeared first on CAMICO.

Dilemmas Employee Retention Credits Pose for CPAs

Amber — Fri, 06 Jan 2023 16:07:00 +0000

Ethical Dilemmas

Many CPAs are considering (or have used) contingent fee billing arrangements to assist their clients with obtaining Employee Retention Credits (ERC). Unfortunately, many believe they’re permitted to accept contingent fees for amending their clients’ payroll tax and income tax returns. But CPAs are not permitted to charge contingent fees for amending these returns to obtain these payroll tax credits. Professional standards¹ prohibit CPAs from charging contingent fees to prepare original or amended returns.² Some CPAs erroneously believe these services fit within one of Treasury Circular 230’s or the AICPA Code of Conduct’s exceptions.

Some CPAs believe that the American Rescue Plan’s extension of the statute of limitations (from three to five years) permitting the IRS to consider employers’ ERC eligibility and the propriety of the calculated credit amounts, guarantees “substantive review” by the IRS.³ Although it provides the IRS with more time to consider the eligibility and appropriateness of the credit, the extended period for review does not guarantee the amended returns would receive substantive IRS consideration.

Some CPAs also mistakenly believe they may accept fees for referring clients to “ERC shops” (enterprises that have sprung into existence to profiteer by charging a percentage of the ERC they calculate). These shops’ business models are singularly focused on amending payroll tax returns to maximize the ERC and their fees. So, the combination of the single-service nature of their business models — and the remote possibility that ERC shops will remain in existence when the ERC market evaporates — makes it unlikely that they will be around to defend their positions (if and when the IRS gets around to considering their propriety). This possibility is even less likely with the additional two-year extended window.

Some ERC shops and entities have solicited CPAs for referrals. There are also impediments to CPAs accepting referral fees from these entities. CPAs are prohibited from accepting commissions or referral fees from clients for whom they (1) perform an audit or review of financial statements, (2) compile financial statements without indicating a lack of independence in the compilation report, or (3) examine prospective financial statements.⁴

Also, since most ERC referral fee arrangements are contingent upon the amount of the credit obtained, the referral fees paid to CPAs referring their clients to ERC shops would, by extension, be contingent fees. So, it would be unethical (prohibited) to receive such fees if (1) the fees are contingent upon the amount of ERC the employer is to receive, (2) the fees are contingent upon the amount of fees received by the ERC shop, or (3) the CPAs believe the fees they’re to receive from the ERC shop are from a contingent fee arrangement.

How Should CPAs Bill for ERC Assistance Services?

CPAs should adopt one of the traditional billing arrangements — either hourly rates or fixed fee arrangements.

Tax, Accounting, and Financial Statement Reporting

While many employers qualify for substantial ERCs, some have been misled into believing they’re entitled to more than they are eligible for. A big reason so many employers (your clients) have erroneously pursued credits (for which they don’t qualify) is because they have been bombarded by solicitations from ERC shops purporting to be able to obtain massive credits and refunds that they don’t qualify for. The IRS has issued alerts⁵ expressing concern regarding inflated credits being taken by employers misapplying the tax rules to claim inflated ERC. These employers allege that their operations were fully or partially suspended due to a (COVID-19-related) government order when they don’t meet those requirements. Unfortunately, considerable confusion remains as to what qualifies as “suspended operations due to a government order related to COVID-19” or having experienced “a significant decline in gross receipts” [the only two paths to qualify for ERC].

Despite never being engaged by their clients to calculate ERC or amend impacted payroll tax or income tax returns (which could impair their independence⁶ ), CPAs still face ERC-related accounting and financial statement reporting dilemmas. CAMICO policyholders face these dilemmas because many of their tax or financial statement clients engaged ERC shops or other professionals to assist them with obtaining ERC. In these instances, CPAs must not subordinate their judgment⁷ regarding their clients’ eligibility for the credit or the amount they qualify for.

Tax practitioners are prohibited from signing a return or claim for refund they know (or should know) contains a position that lacks a reasonable basis⁸ or advising these clients to sign such returns⁹. Tax practitioners must advise clients of potential penalties¹⁰ and inform them of all opportunities to avoid penalties being imposed by disclosing these positions¹¹ using form 8275 or 8275R. IRC §6662 states that a reasonable basis is a greater than 25% possibility of success that the tax return position would be upheld or sustained if challenged.

Tax practitioners may rely on information provided to them by their clients but must make reasonable inquiries if the information appears incorrect, inconsistent, or incomplete¹². Tax practitioners cannot sign or advise a position on a return that is (1) unreasonable,¹³ (2) a willful attempt to understate liability¹⁴ or (3) reckless or intentionally disregards rules and regulations¹⁵.

Further, when aware a client has not complied with tax laws or has made an error on a submitted tax return, tax practitioners must promptly inform their client of their noncompliance, error, or omission, and advise them of the tax consequences¹⁶.

So, tax laws prohibit practitioners from accommodating their clients’ erroneous ERC positions, but, unless authorized by their client or if there is an exception to the Confidential Client Information Rule¹⁷, CPAs cannot communicate these concerns to parties other than the client’s representatives.

If CPAs performing financial statement engagements believe ERC regulations were violated, they must consider whether there was noncompliance with laws and regulations (“NOCLAR”) and whether the financial statements are materially misstated.

NOCLAR is the subject of two AICPA Professional Ethics Division Interpretations issued in 2022, entitled Responding to Noncompliance With Laws and Regulations, effective June 30, 2023, with early implementation permitted.

One Interpretation impacts CPAs in public practice¹⁸ and the other impacts CPAs in industry¹⁹. The public practice rules have subtly different requirements for audit and review clients. The differences primarily involve presumptively mandatory requirements CPAs performing audits and reviews should perform and should seek to perform for other clients. From a risk management perspective, CAMICO recommends that policyholders – even when not required to do so – (1) embrace the presumptively mandatory “should” approach and (2) adopt the NOCLAR Interpretation now. These actions better position CPAs to defend arguments that they “should” have done more or having to argue that soon to be unethical actions were ethical.

If CPAs do not possess the requisite knowledge and experience to assess the reasonableness of their clients’ ERC, they should:

Consult qualified tax professionals to assess whether receiving the credit is probable (the threshold defined in FASB ASC 450, Contingencies).
Obtain written client representations acknowledging (a) their clients’ risks from applying for and receiving the credit and (b) that the CPA and CPA firm neither commented on nor provided any assurance regarding whether the client was eligible for the credit (see illustrative management ERC representation and acknowledgment accessible on the Members-Only Site – in the COVID-19 Resources Page).
If on financial statement engagements, CPAs conclude the receipt of material credits is not probable, or if received, the employer was probably not entitled to receive the credit, the CPA must take steps to appropriately modify the financial statements (disclosing which related accounting policies were adopted and contingencies regarding the credits or deductions), encourage the client to appropriately amend their payroll and income tax returns, modify their report on the financial statements, or withdraw. Possible modifications to the report are numerous and depend upon the financial statement services performed. In such situations, CAMICO recommends modifying the report and adding emphasis-of-matter paragraphs referencing disclosures specific to ERC ineligibility and contingencies.

When management has elected to omit substantially all disclosures in compiled or prepared financial statements, and ERC impact or related-contingency are material, CAMICO recommends adding disclosures deemed necessary under a heading “SUPPLEMENTAL INFORMATION – SUBSTANTIALLY ALL DISCLOSURES REQUIRED BY OMITTED.” Compilation reports would need to be modified to reference the select disclosure(s).

If faced with any of these ERC-related issues, policyholders can contact CAMICO’s Loss Prevention department at 1.800.652.1772 or lp@camico.com.

¹ ET 1.510.001, Contingent Fee Rule
² ET 1.510.001, paragraph .02
³ ET 1.510.001, paragraph .03
⁴ ET 1.520.001, Commissions and Referral Fees Rule

⁵ IR-2022-183, released October 19, 2022
⁶ ET 1.295, Nonattest Services Interpretation
⁷ ET 1.100.001, Integrity and Objectivity Rule and ET 1.130.020 Subordination of Judgment, paragraph .01
⁸ Treasury Circular 230 §10.34(a)(1)(i)(A)
⁹ Treasury Circular 230 §10.34(a)(1)(i)(C)(ii)
¹⁰ Treasury Circular 230 §10.34(c)(1)
¹¹ Treasury Circular 230 §10.34(c)(2)
¹² Treasury Circular 230 §10.34(d)
¹³ §6694(a)(2)
¹⁴ §6694(b)(2)(A)
¹⁵ §6694(b)(2)(B)
¹⁶ Treasury Circular 230 §10.21
¹⁷ ET 1.700.001, Confidential Client Information Rule

¹⁸ ET 1.180.010
¹⁹ ET 2.180.010

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