The issue of widespread questionable ERC claims isn’t going away any time soon. Recently, the IRS released a new statement regarding predatory ERC mills and the present excess of false ERC claims, including tips on spotting misleading claims about ERC eligibility and advice on how small business owners can protect themselves from misleading ERC promoters.
One of the assertions that unscrupulous ERC promoters often make is that any business that experienced supply chain disruptions and lost money due to the pandemic can file an ERC claim and receive a retroactive tax credit. While supply chain disruption does play a part in ERC eligibility, it’s not as simple as these ERC promoters might make it seem.
Let’s take a quick look at how the ERC and supply chain disruption are connected, as well as the latest IRS guidance regarding ERC fraud.
Understanding the Employee Retention Credit and Supply Chain Disruption
The COVID-19 pandemic led to many supply chain disruptions across a broad range of industries and sectors, the reverberations from which are still being felt to this day in many areas. For some small business owners, a supply chain disruption meant they qualified for the ERC, but only under specific circumstances.
What is considered a supply chain disruption?
Broadly speaking, a supply chain disruption is any event or circumstance that interferes with the regular flow of goods, services, or materials across a supply chain. These disruptions cause delays in the production and distribution of goods, leading to the unavailability or short supply of products and services or forcing businesses to temporarily suspend operations.
The IRS requires specific criteria for what is considered a supply chain disruption in the context of ERC eligibility.
Do supply chain disruptions qualify for ERC?
Not all supply chain disruptions qualify for ERC, but some do. General supply chain disruptions do not qualify, but if a business can show that a critical supplier’s operations were suspended due to a COVID-19 lockdown and that it significantly impacted their business, that business may be eligible. Let’s take a look at how.
How does a supply chain disruption qualify for ERC?
In order for a small business owner to legitimately claim ERC for a supply chain disruption with the IRS, the supply chain disruption had to:
- Be the direct result of a government lockdown order, either a partial or total shutdown
- Cause the small business owner to suspend their business operations as a result of their supplier’s operations being suspended, and
- The business was unable to find an alternative supplier.
Let’s look at who is eligible with a few ERC supply chain disruption examples:
- You are the owner of a small consumer electronics manufacturing company that relies on a specific supplier for electronic components that temporarily suspended operations due to a government lockdown mandate in its area. As a result, your company had to partially or fully suspend its operations as well, and may be eligible for ERC.
- You are a restaurant owner that relies on a specific food supplier whose operations were temporarily halted by a government order. If this shutdown led to a significant decline in gross receipts for your business, you may be eligible for ERC.
- You own a small retail store that could no longer stock its inventory due to a government-mandated temporary shutdown of your supplier’s manufacturing facilities, significantly impacting its sales.
These are just a few general examples of how one could be eligible for ERC credit for a supply chain disruption, but of course, a valid ERC claim will come down to the specific circumstances surrounding your company.
How do you prove supply chain disruption for ERC?
In order to prove that a supply chain disruption made you eligible for the ERC, you must be able to prove with clear and organized records that a specific government order directly caused a disruption of your business’s supply chain that directly led to the temporary suspension of your business. You must also prove that no alternate supplier of the disrupted goods existed.
Claiming ERC credit for a supply chain disruption involves keeping meticulous records of documentation such as:
- Official government lockdown orders for the affected area
- Records of communications with suppliers during the period of disruption
- Financial records showing changes in revenue
- Supply chain agreements demonstrating the regular flow of goods or materials
- Employee records
It should go without saying that you need to work closely with a trusted tax professional to make sure any ERC claim you make is substantiated with hard evidence that clearly shows your eligibility. That means being especially wary of unscrupulous third-party promoters who make aggressive, over-generalized, and misleading claims about ERC eligibility.
Exploring the IRS’s New ERC Announcement
Since the summer of 2022, the IRS has been hard at work auditing ERC claims due to the high degree of fraud perpetrated by unscrupulous tax preparers who misled small business owners into claiming tax credits they were not actually eligible for.
Now, the IRS commissioner has recently announced that the agency has worked through its backlog of valid ERC claims and is entering a new phase in its work to address ongoing ERC fraud risk. In other words, the IRS is doubling down on its efforts to deal with audit and criminal investigation work involving dubious ERC claims.
In short, the IRS believes they’ve processed the vast majority of legitimate ERC claims and doesn’t expect very many future ERC claims they receive to be legitimate. With this, they can now commit more resources to investigate ERC fraud by auditing small businesses with dubious-seeming claims and pursuing criminal investigations into fraudulent ERC promoters.
What does the IRS’s new ERC announcement mean for you?
Like previous warnings from the IRS, this could mean more ERC audits are incoming. If you’ve claimed ERC in the past and are having second thoughts about whether you did so with the guidance of a reputable provider, it’s vital to get a second opinion on your ERC credit to determine how likely you areto get audited, especially if you claimed ERC credit for a supply chain disruption.
Keep in mind that an audit is not by itself an indication that an ERC claim is fraudulent— the IRS is just casting a wide net in an attempt to catch the hundreds of thousands of taxpayers who were led to claim credits they were not eligible for by an ERC mill.
If you believe you have a heightened risk of being audited for the ERC, or just want to get a second opinion on your ERC claim, our team at Wiggam Law is here to help. Our expert tax attorneys can analyze your claim and provide you with a detailed risk assessment investigation that can help you understand whether or not your business is eligible for ERC credit and what options you have for mitigating the consequences of a potential audit.
If you’ve been audited over an ERC claim or you think your business may get caught up in the upcoming wave of ERC audits, we can also help you through every step of the audit defense process.
Don’t wait to get help for your business, schedule a consultation with one of our attorneys today or by calling us at (404) 233-9800.