Imagine navigating a minefield where the rules change mid-step, and the consequences of a misstep could be catastrophic. This isn’t a war zone – it’s the reality for tax practitioners dealing with the Employee Retention Credit (ERC) program today. In a recent episode of the Federal Tax Updates podcast, Hale Sheppard, partner in the Tax Controversy section of Chamberlain Hrdlicka, cautioned tax practitioners to be aware of the unresolved legal and regulatory issues surrounding the Employee Retention Credit program.
The ERC, initially designed as a lifeline for businesses during the pandemic, has evolved into a source of ongoing uncertainty and potential risk for tax professionals. From legal challenges to IRS guidance to investigations of “promoters” and retroactive policy changes, the landscape is fraught with hidden dangers. As Hale notes, “We anticipate we’ll be embroiled in these kind of cases for at least the next five years, if not longer.”
Legal Challenges and IRS Guidance
A fundamental question is at the center of the ERC controversy: Did the IRS overstep its authority in issuing guidance for the program? Hale highlights an ongoing court case challenging the IRS’s authority to issue ERC guidance in the form of notices. If successful, this challenge could invalidate much of the guidance tax practitioners have been relying on to advise their clients.
The crux of the matter lies in the Administrative Procedures Act (APA), a law that governs how federal agencies create and issue regulations. Hale notes, “There’s been a whole series of cases recently… in which the IRS has lost because they didn’t comply with the APA.” For instance, in several conservation easement cases, courts have ruled against the IRS for failing to follow proper procedures in issuing guidance.
A recent Supreme Court decision in Loper Bright Enterprises vs. Raimondo overturned the longstanding Chevron doctrine’s deference to government agencies’ statutory interpretations and added another layer of complexity. That decision could significantly reduce courts’ deference to IRS interpretations of tax law, including ERC guidance.
These legal challenges create a precarious situation for tax practitioners. The guidance they rely on to advise clients could potentially be invalidated by court decisions. This uncertainty underscores the need for practitioners to stay informed about ongoing legal challenges, consider alternative interpretations when advising clients, and document their reasoning thoroughly.
The Growing Scrutiny of ERC ‘Promoters’
The IRS is currently investigating companies that heavily promoted ERC claims for potential civil penalties. This focus on promoters stems from concerns about aggressive marketing of ERC services leading to improper claims.
Perhaps most alarming for tax practitioners is the proposed legislation that would dramatically increase potential penalties. Hale explains, “Congress… wants to change it to either $200,000 or 75% of the gross… income received for assisting with something improper, whichever is higher.” This is a stark increase from the current penalty of $1,000 per instance.
The IRS employed subtle tactics to weed out aggressive promoters, sending out 220 letters to companies based on filing volume, inviting them to “educational sessions.” While framed as educational, these sessions allow the IRS to gather information while putting potential promoters on notice.
For tax practitioners, these developments raise serious concerns. The broad definition of “promoter” in the proposed legislation could potentially ensnare practitioners who were simply trying to help their clients navigate a complex program. To protect themselves, practitioners should carefully document all advice given, be cautious about marketing ERC services, and stay informed about the evolving definition of “promoter.”
Navigating Retroactive Changes and Delayed Guidance
Adding to the complexity is the IRS’s track record of issuing crucial guidance long after claims could be filed. Hale provides specific examples, including guidance on supply chain issues that wasn’t issued until July 2023, guidance on OSHA communications came in October 2023, and clarification on third-party payroll providers arrived in February 2024.
This delayed guidance creates a catch-22 for taxpayers and practitioners. As Hale explains, “A lot of this guidance was really issued months, if not years, after the relevant time, which makes it really challenging for the people who are trying to do it right with no guidance. And on the other hand, it’s challenging for the IRS to penalize taxpayers two or three years after the fact if they later take the position that they were incorrect.”
Current Status and Future Outlook
The IRS recently announced it would reopen processing of ERC claims filed before September 2023. They categorized claims into three groups: about 15-20% deemed fraudulent and to be rejected, 15-20% eligible for payment, and 60-70% requiring more information.
The ERC saga is far from over, so tax practitioners must remain adaptable, informed, and strategic in their approach to ERC matters. By continuously educating themselves, they can better serve their clients while protecting themselves in this rapidly evolving regulatory environment.
To gain a deeper understanding of these complex ERC issues and how they impact your practice, we strongly encourage you to listen to the full Federal Tax Updates podcast episode. Hale’s insights provide valuable context and strategies that can help you turn the ERC minefield into an opportunity to demonstrate your expertise and value to clients.