The IRS recently released new FAQs on the employee retention credit (ERC) that clarify the rules in important ways. The new guidance comes as the IRS steps up enforcement efforts and Congress considers options to address improper claims.
The FAQs address several areas of concern that tax preparers and businesses have encountered, including whether business operations are suspended due to a government order. Employers generally may only claim a credit if they experience a significant decline in gross receipts or a full or partial suspension of business operations due to a governmental order. There has been confusion whether government orders that do not directly impact a business’ operations, but rather cause a significant slowdown in customer traffic or a supply chain disruption, constitute a valid governmental order for the purposes of the ERC.
The FAQs clarify that government orders that do not apply directly to a business’ operations and cause a full or partial suspension of operations cannot be used to substantiate a claim for the ERC. The FAQs also clarify that if a business voluntarily closes its doors or reduces its hours of operation, then the business did not experience a full or partial shutdown for the purposes of the ERC.
Other topics covered in the new ERC FAQs include:
- Eligibility
- Qualifying orders
- Decline in gross receipts
- Recovery startup business
- Claiming the ERC
- ERC scams
- Recordkeeping
- Timing
The IRS is also increasing enforcement efforts aimed at improper claims, and Congress is considering action. In a pair of recent speeches, IRS Commissioner Daniel Werfel said the IRS is increasing audit and investigatory activities on both promoters and business as it sees “more and more questionable claims coming in following the onslaught of misleading marketing from promoters pushing businesses to apply.” Testifying before Congress, Werfel suggested giving the IRS authority to regulate return preparers or providing an end date for taxpayers seeking retroactive claims.
Congress appears to be considering its options. House Ways and Means Oversight Committee Chair David Schweikert, R-Ariz., said in a recent hearing that he would consider the IRS proposal to provide a cutoff for new claims, and also discussed a potential amnesty program to allow taxpayers to come forward and rescind improper claims.
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