The Employee Retention Credit (ERC), also known as Employee Retention Tax Credit (ERTC), is a refundable tax credit established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act to assist eligible employers in paying their employees’ wages during the COVID-19 pandemic. Please visit our ERC webpage for more information.
Supply Chain Disruption Alone Not Enough for Employee Retention Credit Eligibility
In a recent clarification, the IRS has addressed eligibility for the Employee Retention Credit (ERC) in light of pandemic-related supply chain disruptions. According to the IRS’s Generic Legal Advice Memorandum (AM-2023-005) released on July 20, 2023, employers experiencing such disruptions are not automatically eligible for the ERC based on that circumstance alone.
The memo explicitly references Notice 2021-20, Question and Answer 12. This question outlines that, if indicated by facts and circumstances, only those employers who had to suspend their business operations due to the inability of their suppliers to provide critical goods or materials due to a government order are eligible to claim the ERC.
Penalties and Interest May Apply to Erroneous Refunds
The IRS also released on July 24, 2023, final regulations (T.D. 9978) authorizing the treatment of erroneous refunds of tax credits previously paid to employers under COVID-19 pandemic response legislation as underpayments of taxes. This determination empowers the IRS to subject excessive refunds to assessment, including penalties and interest, as well as administrative collection procedures.
The IRS had previously issued temporary regulations in September 2021, which also served as the basis for proposed regulations. These regulations granted the IRS the authority to assess erroneous refunds of paid sick leave, paid family leave, and employee retention credits paid to employers under the provisions of the American Rescue Plan Act of 2021. The latest regulations have now removed those temporary provisions.
Employers seeking to claim the Employee Retention Credit must carefully review the IRS guidelines and ensure their circumstances align with the specific eligibility criteria. Employers are encouraged to engage a knowledgeable, known, and reputable professional to assist in navigating the complexities of ERC to ensure they can confidently make legitimate claims under the ERC program.
Erin Kidd, MBA, EA, AFC
Erin Kidd is the Special Projects Manager at Thompson Greenspon and has nearly a decade of tax experience specializing in individual taxation. Throughout her career, she has focused on simplifying complex tax issues and educating clients to maximize their tax benefits and plan for future events. Erin holds a Bachelor’s and Master’s Degree in Business Administration from Morehead State University, is an Enrolled Agent, a federally licensed tax preparer who has unlimited rights to practice before the IRS, and an Accredited Financial Counselor ®. She has been recognized by the Garrison Commands of West Point, NY and Fort Leavenworth, KS for her contributions to the military community for her work with the installations’ Volunteer Income Tax Assistance Centers.