by Dave Horwedel, EA

The Employee Retention Credit is in the news with the IRS sending out thousands and thousands of IRS Audit (aka Examination) Letters and offering a discount if you voluntarily withdraw your ERC .  To understand what to do with your ERC, you need to understand the ERC “partial suspension” test.

If you look at my websites and YouTube Channels, you will see that I have been warning taxpayers about ERC pitfalls and scams and have provided thoughtful, balanced content on how to handle the ERC.

Let’s go back to the actual ERC law.

The ERC “full or partial suspension test” is met if the “operation of the trade or business… is fully or partially suspended during the calendar quarter due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to the coronavirus disease 2019 (COVID–19).” See 26 U.S.C. section 3134(c)(2)(A)(ii).

So, what is a partial suspension?  This is likely to be the key point of contention in getting ERC claims approved and audits resolved. Many ERC claims are still being processed, and the Congress and the President have not terminated the program for new applications (although there is proposed legislation to do so).

ERC Audits are likely to involve the partial suspension test.  This is because the Gross Receipts Test, the Complete Suspension Test, and the Rec0very Start-up qualifications for the ERC are objective and clear-cut.

But what is a “partial suspension”???

Well, the IRS Guidance says a business was partially suspended if more than a nominal part of the business was suspended by a governmental order. The IRS defines “more than nominal” to be “a greater than 10% reduction in your ability to deliver goods and services.”

How do you calculate a greater than 10% reduction in your ability to deliver goods and services due to Covid 19 Governmental Orders?

This is the “up to $26,000 per 2020-2021 employee” question!!!

There is not a lot of IRS guidance on this, but it gets worse.  The IRS does not have the authority to unilaterally change the law.  Their guidance here adds restrictions to the laws passed by Congress and signed by the President to implement the ERC.

This IRS Guidance does not carry a lot of authority. It is not the law or even an IRS Regulation.

By the law, an employer can qualify for the ERC if the operation of the employer’s trade or business was “fully or partially suspended during the applicable 2020-2021 quarters due to orders from an appropriate governmental authority… due toCOVID-19.” Generally, “partially” is defined   as “to some extent” or “to some degree.” Thus, the statute makes any employer whose operations were suspended “to some extent” eligible, assuming he meets the other requirements.

The IRS interpretation is sure to be challenged in court.  To be clear, the ERC statutes say NOTHING about “more than nominal” or a “10% reduction.”

This is the IRS’s interpretation of “partially” but this interpretation is wide-open to challenge and the courts can toss it out as a misinterpretation and IRS overreach, kind of like a used piece of tissue.

How did they come up with 10%. Why not 5%? or 15%??? Who knows??

Another example: Suppose a business was open as it was an essential business, but government orders required its customers to stay home.   Suppose its ability to provide goods and services was reduced 19%.   The IRS says that an “employer that suspends some or all of its operations because its customers are subject to a government order requiring them to stay at home or otherwise causing a reduction in demand for its products or services is not considered to have a full or partial suspension of its operations due to a governmental order.”

Will a court agree with the IRS? Maybe, maybe not.

I suggest anyone worried about the ERC or who receives an ERC audit letter review their qualifications.  Do not make a hasty decision because of IRS pressure.

If you submitted a completely bogus ERC and suffered no Covid-19 governmental order’s ill effects, by all means withdraw your ERC.

Otherwise, look at videos  and articles on my Torchlight Tax and GuardDog Tax websites and  YouTube channels.

Contact us for a free consultation at 1-877-758-7797 or contact us here.

We are glad to Review your ERC.  We  are glad to defend you in an IRS ERC Audit.  We are glad to assist you in any way we can.