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IRS Releases ERC Checklist: All You Need to Know

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To protect business owners from making improper Employee Retention Credit (ERC) claims, the IRS released an ERC eligibility checklist to help clear up confusion sowed by ERC mills. The document, titled Employee Retention Credit Eligibility Checklist: Help understanding this complex credit, includes six questions that help business owners determine if they are likely to qualify. The document also advises those who believe they are eligible to work with a trusted tax professional to claim the credit.

The ERC is a pandemic tax credit created by Congress in early 2020 to help American businesses survive economic hardships caused by COVID-19. As the pandemic enters the nation’s rearview, small and medium-sized businesses have continued to claim the ERC retroactively, using tax credit processing companies to help with qualification and filing.

Over the past year, IRS officials have repeatedly warned business owners about “ERC mills” scamming ineligible businesses into claiming the credit. ERC mills are tax credit processing companies that set low standards for eligibility to “qualify” companies that don’t meet the criteria set by the IRS, pocketing a percentage of the tax refund. To convince small business owners to claim the credit, ERC mills have created confusion around who can qualify—spurring the IRS to temporarily pause ERC processing and release its new ERC checklist.

How We Exceed the IRS’ Six-Part ERC Checklist

At Omega Accounting Solutions, we have helped eligible business owners nationwide claim the Employee Retention Credit with accuracy and integrity. At the inception of our ERC filing service, we designed a rigorous eligibility framework with multiple safeguards against improperly qualifying companies that do not meet IRS standards. We have fulfilled IRS guidelines since day one and we continue to refine our practices as the IRS releases additional guidance.

Omega’s Director of Tax Controversy and former IRS attorney, Tracy Martinez, wholeheartedly stands behind our ERC qualification process. “Omega prides itself on getting it right and we diligently follow the guidelines set forth by the IRS, including those in the six-part ERC Checklist. In each category, Omega’s review of potential and existing ERC claims meets or exceeds the IRS recommendations for determining whether a business is eligible,” Martinez explained.

Here’s how our qualification, calculation, and substantiation practices exceed the IRS’ new ERC checklist in all six sections.

Part 1: Eligible Employee Wages

IRS Eligibility Question: Did you have employees and pay wages to them between March 13, 2020, and December 31, 2021?

Our review includes analyzing the company’s books and records, tax returns, statements, and any other relevant information needed to prove qualification for the ERC. At the end of our review, Omega provides our clients with a thorough, written report that outlines the specific basis for their qualification or disqualification for the credit. We collect all documentation necessary to thoroughly substantiate the client’s eligible wages paid during the relevant timeframe:

  • Proprietary Business Questionnaire
  • Payroll ledgers 2019, 2020, 2021
  • Payroll Tax IRS Form 941 for 2019, 2020, 2021
  • 2019 hours report
  • 2020 and 2021 healthcare statements
  • Entity Ownership details
  • PPP #1 and #2 forgiveness letters (if applicable)
  • R&D qualified wages
  • IRS Form 6765

Once the client has submitted these documents, we assess the client’s case against each eligibility requirement starting from the basic factors to the complexities.

First, we use the 2019 hours report to verify the client’s number of full-time employees is below the maximum for eligibility (100 employees in 2019 for 2020 eligibility, 500 employees in 2019 for 2021 eligibility). Next, we analyze the client’s payroll ledgers to determine the eligible wages and calculate quarterly credit amounts, removing wages that were paid with PPP loans, utilized for COVID-19 pay, or used to claim other tax credits.

Part 2: Employer Exceptions

IRS Eligibility Question: Were you self-employed or a household employer during that time?

Self-employed individuals who did not have employees between March 13, 2020, and December 31, 2021, cannot qualify for the ERC. Neither can household employers who did not have W-2 workers.

If the client cannot produce documentation including payroll ledgers and 941s demonstrating they paid wages to W-2 workers and paid payroll taxes on the wages during the relevant timeframe, we cannot proceed with the ERC filing.

Part 3: Gross Receipts Test

IRS Eligibility Question: Did your trade or business experience a significant decline in gross receipts during the eligibility periods in 2020 or the first three calendar quarters (Jan. through Sept.) of 2021?

Our team examines the following documentation to determine if the business experienced a decline in gross receipts that meets the IRS-required threshold in each quarter:

  • Quarterly Profit and Loss Statements for 2019, 2020, 2021
  • Business Tax Returns for 2019, 2020, 2021
  • Entity ownership details

First, we interview each client to verify the aggregation of all entities the client owns.

Our calculations department then applies the standard method required by the IRS — the gross receipts test — to compare the client’s income from 2020 and 2021 to 2019, determining if the business experienced a sufficient decline of gross receipts in each quarter the ERC credit is available. We utilize standard calculation templates validated by CPA and legal teams to ensure accurate representation of the credit. We then factor in the full or partial suspension timeline to complete the calculation.

Part 4: Recovery Startup Business

IRS Eligibility Question: Were you a recovery startup business? That’s certain businesses or organizations that began carrying on a trade or business after February 15, 2020. The new trade or business doesn’t need to be pandemic- or recovery-related.

We ask our clients to attest their status as a recovery startup business using our Proprietary Business Questionnaire. If applicable, we verify the business’s start date through documentation.

Another requirement for recovery startup businesses is that they cannot make over $1 million of average annual income in the first year of operation. To determine if the business meets this threshold, our calculations department examines the client’s Profit and Loss statements following the procedure outlined in IRS Section 448 (c)(3).

Part 5: Impact Analysis

IRS Eligibility Question: Was the operation of your business or organization fully or partially suspended by a government order due to the COVID-19 pandemic during 2020 or the first three calendar quarters (Jan. through Sept.) of 2021? It must have been a government order, not guidance, a recommendation or a statement.

We utilize a three-step approach to determine a business’s eligibility under the full or partial suspension rule. 

“Our approach takes the IRS Notice 2021-20 seriously,” explains David Christensen, Senior Director of Impact Analysis. “We use interviews, data collection, data analysis, order reviews, and the IRS-identified ERC Paths for eligibility all to document our client’s experience during the COVID-19 pandemic and verify if the way they were impacted makes them eligible—or not—for the ERC.” 

We build a detailed report that substantiates the client’s attested experience with a timeline of government orders and business data.

Step 1: Client Interview

We begin Impact Analysis by interviewing the client using non-leading questions to identify if their business was impacted by government orders. 

Step 2: Eligibility Pathway

Using the details gathered in the interview, we outline a potential path to eligibility that we can support with documentation and data. Alternatively, we notify the client if we find they will not qualify.

Step 3: Data Analysis & Documentation

To measure the impact that pandemic-related government orders had on a business’s daily operations, we conduct a deep analysis of financial, operational, and raw data from various business software solutions. If our analysis cannot substantiate a “more than nominal disruption” of business operations—defined by the IRS as a 10% reduction in gross receipts or cumulative employee labor hours—we notify the business they do not qualify and close the case. If we do find the business experienced a “more than nominal disruption,” we move forward with documenting the substantiating data and relevant government orders that impacted the business.

Part 6: Supply Chain Issues

IRS Eligibility Question: Are you claiming the ERC because of supply chain issues?

In early 2022, it became apparent to our Impact Analysis team that the pathway to qualify through supply chain issues is dangerously open-ended, making it susceptible to abuse by ERC mills. 

To avoid any potential issues, we made a proactive policy decision to not qualify clients through this path—with very few exceptions. In exceptional circumstances, we require a high level of substantiation to qualify, including documentation from the client’s suppliers stating they could not fill orders for the client due to COVID-19-related orders.

Completing the ERC Filing for Eligible Businesses

Once the eligibility analysis outlined above is complete, we move forward with calculating and filing the ERC credit, ensuring the client’s claim is thoroughly substantiated to satisfy and exceed the ERC checklist. Sean Woods, Omega’s Chief Financial Officer, highlights the importance of documentation, “The IRS requires significant evidence to substantiate an ERC claim, and our team of experienced tax professionals will work closely with you to help identify and collect the necessary information for that purpose.”

To complete the ERC filing, we first return to our Proprietary Business Questionnaire, using the information to remove wages paid to the majority business owners and their family members. Next, we use the employer-paid healthcare expenses on the client’s healthcare statements to maximize the client’s credit amount. Once the quarterly credits are calculated, our team uses the client’s existing forms 941 to validate that the wages on the payroll ledgers were reported and that the payroll ties to the wages on the 941s. Finally, the 941s are used to prepare the 941-X amendments to retroactively claim the ERC.


Choose a Trusted Advisor for ERC Credit Filing

Since the inception of our ERC processing service, Omega has worked diligently to set the highest standards for honest and accurate filing. We do not just satisfy the IRS’ ERC checklist—we provide each client with a comprehensive Substantiation Report documenting precisely how the client meets ERC requirements.

We also provide an ERC Compliance Review service that helps business owners who may have been improperly qualified for the credit by an ERC mill, assessing their compliance with IRS eligibility rules and identifying any potential liabilities or errors. 

“Our ERC Compliance Review process is thorough and is designed to give you confidence that your ERC claim can be properly supported should the IRS question you,” Woods stated. As the IRS ramps up enforcement with ERC audits, businesses should be proactive about correcting any potential violations ahead of time.

 

 

About the Author

Tracy Martinez, Tax Controversy Attorney

Tax Controversy Attorney leading the new Tax Controversy Practice at Omega, Martinez brings 35 years of tax legality expertise, serving as Senior Attorney within the Tax Division of the U.S. Department of Justice (DOJ) and Senior Attorney within the Office of Chief Counsel for the Internal Revenue Service (IRS). She holds an LLM from Georgetown University Law Center, JD from Albany Law School at Union University, and a BA in International Relations from Colgate University. Martinez enjoys aiding clients across the various stages of IRS examinations, from dispute avoidance to issue resolution and post-exam improvements.