The IRS published a new set of Frequently Asked Questions about the Employee Retention Credit (ERC) on July 27, 2023, and then updated them again on July 28th. The new questions and answers reflect the content of a series of recent news releases by the IRS as recently as July 26th.
The new ERC FAQs from the IRS are broken into eight sections: (1) Eligibility, (2) Qualifying orders, (3) Decline in gross receipts, (4) Recovery startup business, (5) Claiming the ERC, (6) ERC scams, (7) Recordkeeping, and (8) Timing.
There is essentially no new information in these FAQs except, perhaps, the additional detail included under Q5 in the Qualifying Orders section, “Was my business or organization fully or partially suspended if I had a supply chain issue?” The answer summarizes and links to the recently released Chief Counsel Memo AM 2023-005 which clarified the Service’s position related to supply chain disruptions introduced in Question 12 of Notice 2021-20.
The new ERC FAQs are appearing subsequent to a two-hour webinar held by the IRS presented by Lloyd Kinlaw, IRS Technical Data Analyst/Project Manager, and Carolyn A. Schenck, National Fraud Counsel and Assistant Division Counsel, SB/SE Office of Chief Counsel. While the webinar was advertised to include “a live Q & A,” very few participant questions were addressed. In response to one question, Mr. Kinlaw opined that the employer in question would not be eligible for the ERC:
“In this case, no, because the full or partial suspension test takes into consideration business operations and not the physical location of the business. So, you know, if there’s a mere deviation from the normal business practices, it doesn’t necessarily qualify the employer for the ERC. Now, if the business continues operating by some non-traditional method, then the business has not suspended its business operations, so it doesn’t meet the requirements for this test.”
This answer, however, leaves out many of the complex considerations addressed in IRS Notice 2021-20 Q&A 15 through 18. For example, in Answer 17, the Notice says, “If all, or all but a nominal portion, of an employer’s business operations may continue, but the operations are subject to modification due to a governmental order (for example, to satisfy distancing requirements), such a modification of operations is considered to be a partial suspension of business operations due to a governmental order if the modification required by the governmental order has more than a nominal effect on the business operations under the facts and circumstances.”
In response to a question about what to expect in an IRS examination of the ERC, Ms. Schenck digressed to discuss “a particularly egregious fact pattern that we’ve seen.” She explained, “We’ve seen a situation a couple of times where the taxpayer has increased its labor six-fold, so it’s gone to nearly 2,000 employees, and it saw similar increases in gross receipts during the Covid period of time, but yet it claimed $33 million of credits.” However, nothing in published IRS guidance indicates that businesses that were partially suspended due to orders from appropriate governmental authorities must also have experienced declines in staff or gross receipts. While gross receipts are discussed in Question 11 of Notice 2021-20 in the context of evaluating partial suspension, they are used there as a measure of whether the suspended portion of a business was more than nominal. Congress established two independent tests for determining employer eligibility, and it appears to be a common misconception to conflate the two.
Ms. Schenck also provided her view of the legislation’s intent:
“This safety net was not entitled for scenarios like this. As Lloyd mentioned earlier in the presentation, the ERC was enacted for businesses—employers—who continued paying employees during a shutdown due to the Covid-19 pandemic or who experienced declines in gross receipts from March 13, 2020 to December 31st of 2021 [sic.]. Now, the bottom line is, we’re advising you to be prepared for the question of, how did Covid impact your business? And remember, Covid impacted everybody. Now, this is not a ‘Covid-is-terrible party payment.’ Everybody was impacted by Covid, and based on the eligibility rules set by Congress, you should interpret those to mean that not everybody is going to get a payment as a result.”