An interesting case here of a law firm with a 2021 suspension claim based on suspended jury trials.

I had thought Employee Retention Credit refund suits would be uneventful (why invite scrutiny toward unclear claims?), but it turns out a recent case may wade into the gray. 🧵 First off - injury laws firms are GREAT candidates for ERC. But not necessarily because of suspensions.

These firms are typically cash basis and may enjoy major settlement fees in a very uneven schedule. This likely "lumpy" revenue results in receipts drops for ERC being common.

The IRS has denied ERC claims of $2.6M for a California urgent care center coving all six possible quarters. The rationale for the denial appears in a new court filing.

We also receive a bonus ERC denial document for a separate business - and it's a long-expected APA lawsuit.

IRS Position:

"The mere existence of a modification, including occupancy restrictions and requiring appointments for services, is insufficient. The taxpayer did not establish that mandated modification had more than a nominal effect on business operations."

$1.5 Million of ERC was claimed for a Tennessee landscaping company who was not eligibleat all.

Now the company is suing the CPA over a $300,000 contingent fee.

Summary: Every supply chain ERC is bogus (but some are extra bogus) The lawsuit outlines how a questionnaire was filled out, eligibility was based on supply chain, and no other documentation/followup occurred.

No copies of orders on the suppliers.
No documentation of more than nominal effect.
No proof supplies couldn't be obtained elsewhere.

Restaurant Revitalization Fund and PPP eligibility fraud all in one case.

Two arrested. Real estate and $2.4M in cash seized.

This indictment involves two real businesses and shows the govt is going after cases of bad eligibility - not just fake businesses seeking COVID funds. Here is the outline:

PPP1 $83k
PPP2 $181k
RRF $526k

PPP1 $142k
PPP2 $106k
RRF $735k

The IRS has denied a large ERC on audit.

This is the first, informative case I have seen.

Key takeaways:
• Need measurements of nominal
• Narratives are not enough alone
• Must show orders were followed
• Volume of audit submissions and strong credentials are no guarantee. This case was shared with me by a west coast attorney involved in the audit defense process. He is now more nervous about other cases due to the hardline approach by the IRS.

The business here was white-collar and able to remote work. It was an essential business.

Woods v. US (2011) Nos. SA–05–CA–216 SA–05–CA–217.

An interesting case of penalties applied despite much legal and accounting advice relied on.

Parallels here to ERC. In 1999, a tax avoidance strategy was dreamed up by a law firm, marketed by EY, and implemented by another law firm.

Even its proponents described it as an “aggressive” strategy.

ERC IDR item to provide:

"Documentation WITH THE DATES that operations were fully or partially suspended due to orders ... Provide a copy of the order ... HIGHLIGHTING the specific provisions causing the suspension of business operations." "(DO NOT include recommendations by authorities or other statutes, orders or other documents that are not related to COVID-19)"

New proposed regs on microcaptives are causing a stir. Here are my takeaways:

• Dealership captives are fine
• Owners don't have to disclose anymore
• Now is the time to get out
• Everyone is getting audited Okay, not everyone perhaps. But the IRS certainly is firing a big warning shot.

"The IRS INTENDS to challenge" microcaptives classified as listed transactions and "MAY challenge the purported tax benefits" when it's only a transaction of interest.

The first ERC fraud indictment was just issued from a grand jury on Feb 1st.

But don’t start celebrating yet. These were not the folks calling about your $26k per employee. This scheme was over before most “ERC mills” even began.

No, this thread is about owner wage fraud. 1/ Before it blew up in 2021, ERC was just that lesser program that you couldn’t get if you already took PPP.

Enter COS Accounting with a plan. Take independent contractors, convert them to S-Corps, create wages, and claim ERC. 2/

🚨 IRS is pulling 90% of exam staff to focus on audits of the Employee Retention Credit. 🚨

The pilot program took place in Jul/Aug resulting in big dollars assessed. Now workloads have already been assigned and await agent training to be completed in Oct/Nov.

It's happening. These audits do not just go after businesses. Agents are instructed to review the preparer and determine whether any promoter is involved. They will be asking how the client learned about ERC including promotional materials and referral agents.

They took three PPP loans and now have to explain.

The season 15 premiere of It's Always Sunny in Philadelphia tells us how the gang's new hustles made an impact. But how did they manage to get the relief money in the first place? Here's what I know.
1/x Things get off to a rocky start as Paddy's Pub was locked down in March of 2020. And as it turns out, while giving employees cash is standard fare in Philly, the lack of payroll reports proves a problem in the PPP loan application process. The bank denies Paddy's loan.
2/x

RSB ERC for existing business - a real world example:

Client was shutdown three different times in 2020. Revenue is decimated. Revenue finally recovers to 94% of 2019 in Q2 of 2021. So ERC is eligible from Mar20-Jun21.

What about Q3/Q4 ERC 2021? No shutdown, no drop, RSB? Well the existing business is not new. So it would not appear to be a Recovery Startup Business at first glance.

But what do ya know... as I tell the client about eligibility ending and the new RSB rules, I find out that he began driving Uber when things were bad in 2020.

An established business can still open a Recovery Startup Business to claim up to $100,000 of Employee Retention Credit in Q3/Q4 of 2021.

ERC can be claimed for a RSB opened in either a new entity OR AN EXISTING ENTITY.

How do we do this correctly? Thread time:

#TaxTwitter IRS Notice 2021-49 was released last Wednesday. It gave us guidance in many areas of ERC but didn’t break major ground on the topic of a Recovery Startup Business. The law was brief and caused confusion in this area. The confusion didn’t go away after reading this notice.

You have run out of wages to maximize ERC and PPP.

Before giving up, consider creating more wages by using an estimate of tips paid. The same wages cannot be used for both the ERC and PPP relief programs. So maximization can be hard. But significant differences in the two programs make opportunities to be creative.

How to maximize ERC and PPP interplay: A thread

After spending far too much time in this area, I wanted to share some ideas for maximizing the employee retention credit. Will try to include everything from the obvious to the obscure.

#TaxTwitter 1)Get the payroll data by employee by pay.

The key to getting max benefits is in slicing and dicing payroll. We can pick and choose which wages are claimed for either ERC or PPP specifically. This could mean anything even down to dividing a single paycheck.

Hats off to @TGorcz for a very well written explanation of the >50% owner eligibility problem for ERC - while also discussing the issue of preparer penalties for taking positions without a "reasonable basis."
tomtalkstaxes.com/p/tom-talks-ta… I agree with @edzollars that there is not a reasonable basis to take ERC for >50% owners.

https://twitter.com/edzollars/status/1384580510786101250?s=19

Relatives of a greater than 50% owner are not eligible wages for ERC.

But are relatives of a LESS THAN 50% owner eligible for ERC? You would think so, but often even these relatives are ineligible.

Let's look at a very common example:
1/x An S-Corporation is owned 50/50 by unrelated individuals, A and B. Each owner has a son employed in the business as well - Y and Z.

In total, the S-Corporation has four employees: owners A and B, and sons Y and Z.
2/x