New IRS Chief Counsel Analysis of ERC Supply Chain Issue

July 21, 2023 by Max Shenker

The IRS Office of Chief Counsel released a memorandum on July 21, 2023, addressing “Whether an Employer Experienced a Full or Partial Suspension of the Operation of a Trade or Business under Section 2301 of the Coronavirus Aid, Relief, and Economic Security Act or Section 3134 of the Internal Revenue Code due to a Supply Chain Disruption.”

The memo is a commentary discussing the limitations of ERC eligibility first introduced by the IRS itself in an FAQ and later in Question 12 of Notice 2021-20. The memo introduces five new scenarios that would not lead to ERC eligibility, such as:

“Employer A was not subject to any governmental orders limiting commerce, travel, or group meetings due to COVID-19 at any time. However, during 2020 and 2021, Employer A experienced several delays in receiving critical goods from Supplier 1. At all times during 2020 and 2021, Employer A continued to operate because Employer A had a surplus of the critical goods normally provided by Supplier 1. Employer A assumed that Supplier 1’s delay in delivering critical goods was caused by COVID-19. Employer A inquired and Supplier 1 vaguely confirmed that the delay was due to COVID-19. Supplier 1 did not provide a governmental order from an appropriate governmental authority and Employer A was unable to locate one.”

While Bloomberg Law reports, “Employers who were hampered by supply-chain disruptions during Covid-19 but weren’t actually ordered to shut down aren’t eligible for a pandemic-era tax credit aimed at encouraging companies to keep employees on their payroll, the IRS said,” the memo, in fact, upholds the original guidance in Notice 2021-20 allowing a supply chain disruption to confer ERC eligibility. The IRS Chief Counsel memo focuses on the narrow application of that guidance:

“A supply chain disruption, by itself, does not rise to the level of a full or partial suspension primarily because no governmental order applies to the employer’s operations. In addition, the goods or materials that are disrupted may not have had an impact on the employer’s operations that rises to the level of a full or partial suspension, or the employer may have been able to obtain the goods or materials from an alternate supplier. The guidance provided by section III.D., Q/A-12 of Notice 2021-20 allows the employer to ‘step into the shoes’ of its supplier for purposes of the suspension test. To meet the terms of this exception, as explained in Q/A-12, the supplier must have been subject to a governmental order that causes the supplier to suspend its operations. In addition to having a governmental order, the employer must substantiate its eligibility for the credit by providing records or documentation demonstrating that (i) the governmental order caused the supplier to suspend operations, (ii) the inability to obtain the supplier’s goods or materials caused a full or partial suspension of the employer’s business operations, and (iii) the employer was not able to obtain these critical goods or materials from an alternate supplier.”

Congressional Oversight Hearing

The House Ways and Means Oversight Subcommittee announced on July 20, 2023 a hearing on “The Employee Retention Tax Credit Experience: Confusion, Delays, and Fraud” to take place on Thursday, July 27, 2023. According to the announcement, the hearing will be “on the backlog of the Employee Retention Tax Credit (ERTC) processing, Internal Revenue Service response to inquiries about ERTC credits, and the impact of fraud on those legitimately trying to claim the credit.”

Related Posts

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