Updated: May 31
As the business landscape continues to evolve in response to the COVID-19 pandemic, CPAs play a crucial role in guiding their clients through the complex maze of tax regulations and incentives. One such incentive that has gained significant attention is the Employee Retention Credit (ERC). In this blog post, we will explore the AICPA's (American Institute of Certified Public Accountants) recommendation to CPAs regarding the ERC and the caution they should take in amending related client tax returns.
Understanding the Employee Retention Credit:
The ERC was introduced as part of the CARES Act in 2020 to help eligible employers retain their employees during the economic uncertainties caused by the pandemic. It provides a refundable payroll tax credit to businesses that experienced significant disruptions in their operations due to COVID-19 but continued to pay wages to their employees.
One way a business can qualify is through a bright-line gross receipts decline test. However, the second way a business can qualify is through suffering a more than nominal impact due to a partial or full closure as a result of a federal, state, or local mandate that limited commerce, travel, or gathering due to COVID-19. This second area of qualification has created an opportunity for overly aggressive ERC claims by third-party providers.
The AICPA's Warning To CPAs:
As a result of a business claiming the ERC, the client may ask their CPA to amend business and/or personal tax returns. Consequently, CPAs could potentially face professional liability claims in the future if a client's ERC is disallowed by the IRS, even if the CPAs themselves did not calculate the credit.
One could argue that the third-party responsible for the erroneous credit calculation should be held accountable for any mistakes, rather than the CPA who prepared the amended tax returns. However, the IRS has five years from the date of the ERC filing to examine the payroll tax returns (compared to the usual three-year statute of limitations on income tax returns.) The general fear is that third-party providers who helped taxpayers create positions of eligibility may no longer be in business by the time the IRS examines the claim. And even if they are still operating, they may not have sufficient assets or insurance coverage which could leave the CPA liable to respond to the client's assertions of incorrect eligibility. Defending against these claims could be difficult if the CPA did not adhere to professional standards or maintain adequate documentation to support their actions.
As a CPA assigned with the responsibility of amending tax returns associated with a client claiming the Employee Retention Credit, it is paramount that you inquire of your clients who have claimed the ERC that their basis of ERC eligibility has a realistic possibility (defined as a 33% or greater chance) of being upheld during the course of an IRS audit. The AICPA has advised that CPAs whose clients have claimed the ERC communicate with those clients regarding the potential outcomes of claims that may later be denied under examination.
While the AICPA has given specific guidance regarding the nature of writting communication CPAs should initiate with clients regarding possible outcomes resulting from ineligible ERC claims, they noted that CPAs should not prepare or amended client income tax returns when their ERC claim has a less than reasonable basis of being upheld. They advised:
"In addition, if the CPA does so and the client’s ERC claim is later denied, the client may allege the CPA, through its preparation of the tax return reflecting the ERC claimed, tacitly agreed with it, thus negating all prior written warnings provided to the client." - AICPA RISK ALERT 2.1.23
Therefore it is paramount that CPAs proceed with caution regarding the third-party ERC providers they recommend to their clients. By diligently vetting and selecting a reliable service provider, even if they personally do not conduct the ERC study, they can retain a measure of information and control over the study process.
A Partnership That Grants CPAs Peace of Mind
Through our extensive 20 years of experience in tax credits, proven track record, and the assurance of having a licensed tax attorney to provide audit defense, both you and your clients can benefit.
Stay Informed: We stay up-to-date with the latest guidance issued by the IRS, as ERC rules have been subject to frequent revisions. Regularly monitoring official sources ensures accurate and reliable information is provided to clients.
Evaluate Eligibility: We thoroughly assess our client's eligibility for the ERC, taking into account factors such as business disruptions, government restrictions, and revenue declines. While the AICPA designated a client needing at least a 33% chance of sustaining the credit, our firm looks to create a 50% or greater chance (more likely than not) to sustain under audit.
Document and Maintain Records: It is crucial to document and retain all relevant records supporting the clients' ERC claims. Detailed records should include proof of eligibility, calculations, and any other necessary documentation to substantiate the credit.
Maximize Credit Opportunities: We assist our clients in identifying opportunities to maximize the ERC. This involves analyzing various factors such as the interaction of the ERC with other relief provisions, optimizing wage calculations, and understanding the impact of full or partial suspension of operations.
The Employee Retention Credit presents a significant opportunity for businesses to receive tax credits and retain their employees during these challenging times. CPAs, armed with the AICPA's recommendations and a trusted tax incentive expert at the ready, can guide their clients through the intricate ERC landscape.
As a CPA, it's essential to leverage the AICPA's resources to stay informed and proactively help clients navigate this evolving tax incentive. For more information, visit the AICPA's Risk Alert on Aggressive Employee Retention Credit Practices page: AICPA ERC Risk Alert.
Want To Discuss This Further?
We understand that the AICPA's recent recommendation about the ERC may raise concerns and uncertainties. We are more than willing to delve deeper into these topics and provide you with additional information. We also encourage you to share this valuable knowledge with your fellow CPAs and invite you to connect them with our reputable firm. To get in touch with us, feel free to give us a call at 214-414-9881 or send us an email at email@example.com.
Hear More From Lindsay Polyak Here:
In this video, Lindsay walks through the recent AICPA's warning.