Navigating Tax Law with Dan Chodan
The “ERC Nerds” unite on Episode 78 of The Unique CPA, as Dan Chodan of Trout CPA joins Randy Crabtree to discuss the multifaceted nature of the ERC. They most especially get into the confusion surrounding this program being administered by the IRS, as well as going over some common areas where the confusion seems to be hitting the most. They also talk about a number of “horror stories” they have encountered, many of which have been perpetrated by pop-up tax shops looking to make a quick buck off the “ERC frenzy.”
Today, our guest is Dan Chodan. Dan’s a partner with Trout CPA out Pennsylvania—I got that right, Pennsylvania?
Alright. On the website, Dan’s listed this serving on the firm’s auto dealerships and manufacturing practice groups, which I’m sure are extremely exciting, but what we’re really going to talk about today—and what I know Dan as—is the Employee Retention Credit Twitter king, and so between his Twitter expertise with the ERC, and my webinars, I think we’re going to be able to geek out about ERC here quite a bit. So Dan, welcome to The Unique CPA.
Glad to be here.
It’s a pretty interesting—well, at least I know, you probably feel like it, I do—it’s just a pretty interesting subject, and pretty interesting time we’ve gone through with the Employee Retention Credit. Before we get into that, let me ask you about—were you dealing with Employee Retention Credit from the start, from the Cares Act? Or did you start with the Consolidated Appropriations Act?
Yeah. We touched it from the start. But as you know, and I think most listeners to this probably know, until the Consolidated Appropriations Act, it was just ignored, right? We looked at it, ran the numbers, PPP made more sense than ERC almost entirely.
So we knew it, but we didn’t really know it until we had to. So that was what really changed. So I got sucked into that early on, had the PPP attitude of “Allright, we need someone to deal with this, someone that’s going to sink in the time.” So then when ERC came around, and it was so joined at the hip, when it opened up to everybody, December 2020, that law passed—boy, you know, we really had to hit the ground running. And it wasn’t really a choice for me and ERC at that point. PPE kind of just pulled me right into it. You can’t start from square one without knowing the PPP program as well.
Right. So you were the firm’s expert on PPP, then, originally?
Yes, we had a small team just for all COVID relief. So there’s other grants, right? And the other programs that we’re working in assisting clients with as well. But of course, the big one was PPP.
Oh, yeah, for sure. So before the Consolidated Appropriations Act, I mean, do you know how many ERCs you had done? Was it a handful? Or was it more than that?
I myself, I don’t know that I had actually touched them. But firmwide it was less than a handful. Just three or four? So just unique circumstances. And that’s what made sense for them. So yeah, it was amazing to see the difference and a lot of the mess created and how that retroactively changed literally just overnight.
Oh yeah. So then when you heard about the change—is this a firm wide, You know, somebody was reading the new law and bingo, this just changed? Or how did you hear about this change in the ERC?
Well, I mean, you brought up Twitter. Tax Twitter is really just phenomenal, and had been on kind of the cutting edge of so many of these changes all throughout the pandemic—the PPP guidance changing, planning around that, all the pieces as they would come out. Those interim final rules are gonna give us PTSD for years to come and those drops of guidance. And so it really all the tax law changes, then those came as well. And they’d really be ahead of that looking at drafts. So I’d be amongst that group of people just combing through the draft legislation, and a different draft would come out, and then you’d see what it was there.
So it was, it was probably mid-December, I suppose, when it sort of became clear, “Wow, there’s a big important change in this appropriation bill.” And it took a while before it actually became law, but as some of that legislative text came out, and it’s being parsed out there on Twitter, that’s really where it became clear. And, you know, others, I feel like probably the general population of CPAs, or just many advisors in general, by the time that bill was out, and things filtered down, there was a busy season there into January and the rest of it, so most probably didn’t really get going from it from the start, like some did. A large majority, it probably wasn’t till the summer of ‘21 before they really dug in, so.
And we, you know, even our team didn’t really gear up fully. You know, we started filing them in January, but it was a trickle, and then it became a fire hose as time kept going on, and we accelerated. But yeah, I can’t say enough about some of the smart minds out there on Tax Twitter, looking through the bills and draft language, parsing it out and just being ahead of things, sharing ideas, has been fun to be a part of for the last couple of years. And now you said I’m leaving the ERC there on Tax Twitter. But I think I’m just the one that rants the most about it, perhaps? There’s plenty people that are far more intelligent than me that participate there as well.
So who are some of the other people that were early on with Tax Twitter and the ERC? And I can tell you where I heard about it, but let me let me let you go first on that.
Oh, boy, I mean, there’s almost too many names, too many names really to mention. But you know, the groups and everyone that was looking at it, you know, we’d have some that are just posting everything as it comes, and others that are digging through in one area or another.
So it just comes from all aspects. There’s hundreds, and then even beyond that, there’s plenty more that don’t participate, but are just following and reading. So yeah, there’s a great mix there. There’s solo practitioners that are all over Tax Twitter, but then there’s there’s even large top 10, top 20 firm employees and partners that I’ve interacted with and had communications through that. So that’s been pretty interesting to see, especially as I’ve had some more complex areas come up, ones that might touch multinational aggregation for the ERC—these issues that don’t necessarily hit the smaller firm levels. I wasn’t seeing them, but I reached out to—I know this person here at a larger firm has dealt through these. So it’s been interesting to see the opportunities and connections you can make through a platform that I would not have envisioned before.
Oh, I know. Exactly. I mean, it’s the number of people that I’ve met, and actually just the opportunities that have come to me, not even related to ERC, but because of ERC, you know, have been insane. And so just real quick, I said, I’ll let you know—I wasn’t ahead of it, December 15th timeframe like you, looking at the draft. I was actually, my wife and I went and worked remote at South Padre Island, Texas in early January, and I was on a conference there that Tony Nitti was speaking at. And he started speaking about these changes to the ERC, and it just was like, I was immediately hooked. I was like, “I gotta find out everything I could possibly”—and this was maybe January 7th or something. So I was, you know, 10 days late to the party after the changes happened.
But when he started saying this, I just couldn’t get enough. I just dug in, I was reading everything, I was analyzing, I was looking at the legislation, I was looking at anything that came up. And at that point, personally, I wasn’t even sure we were going to make this a service offering. It was just something—I’m big on education. It’s like, “Well, if I can know all this, and I can educate people, I think this is an important topic.” You know, you could look to the future and see there’s a lot of businesses that are going to qualify for this. So you know, I don’t think I’ve ever talked to Tony Nitti, he probably doesn’t know who I am, but thanks, Tony, because you really got me going on down the road of this. So that’s where I started on ERC.
He’s one of the greats for sure, and one of those that really got Tax Twitter going long before I found it. I think I might have actually found it through him, even mentioned it in an article of his for Forbes or something to that effect, his thoughts on some of the writings on the ERC and digging into the changes long before the later guidance came out, digging into the statutory language and being ahead of things. Constantly impressed by that guy.
Yep. But I don’t think I could, you know, I can take one subject and dig into it. I mean, not the overall federal tax code updates that he’s constantly doing. And yeah, that would be—man, that would take a lot.
Alright, so that’s the origin story for four years, see how you got involved, how I guess a little bit about how I got involved. We don’t need to talk about what the ERC is—there’s enough information out there. What I think it’d be interesting to talk about is: We know what the ERC is, at least you and I probably, better than most people in the country. Unfortunately, there’s a ton of misinformation out there on this. It is daily, I get misinformation. And I hear horror stories about people taking credits they shouldn’t. So you know, do you have a top 10 or top 3 or top 5 pieces of misinformation that you just get so frustrated with and are dealing with battling against constantly?
Absolutely. We could probably spend the rest of the afternoon here just going through and the more we talk, the more we’re going to remember some new nonsense.
But I’d love to share some of that. I am probably over-conservative as being the accountant that I am. I’m not going to be out there doing things that are going to keep me up at night. I share that with clients I work with on this. But the longer I spend around the program, the less gray it seems, right? When you first started looking at it, there’s all this opportunity, you know, who really, who knows? But the more guidance that came, the more you see the examples, the more you dig into the text of the law and apply it to examples, and see how this actually impacts the real world, the less it seemed like there’s all this wiggle room and you can do whatever you want.
Certainly run into a lot of different nonsense in that regard. And I’d shared with you, we’d spoken previously, one of these was so intriguing to me that I put a lot of time into it, to try to say, “Alright, this is this is amazing. If this works, I need to know about it. I need to use it for my clients. If this argument holds water, this is amazing.” And so I ended up writing an article about that.
Yeah, you’re gonna talk about the OSHA rule. So just to let you know, I’ve used your information in my last two webinars, and I’ve quoted you—I haven’t said this is from me, “this is from Dan Chodan, the article he wrote in”—what’s it called, the magazine you wrote this for?
Yeah, Think Outside the Tax Box, I was contributing there. So yeah, I had a lot of fun digging into that, got real excited about it, but it pretty quickly became apparent that this, unfortunately, is just a better dressed-up version of a lot of the nonsense that we see, aggressive positions being taken, unfortunately.
And it’s not that I don’t want to help clients. I also have an article on there, where I’m talking about all the unique ways we can qualify, you know—this program is still hiding in plain sight in so many different ways.
But boy, you see some of this stuff, and the sad part is clients don’t know better. They hear that they’re talking to a professional, they hear audit risk guarantees, and they think they’re just fine. And it is a complex program—there’s no doubt about it—so that creates this confusion. And a lot of CPAs that might not be well versed in it can’t necessarily say otherwise. That’s what I was trying to accomplish with that article was just give some ammunition. If someone’s looking for this topic and sees this argument, they’ll hopefully find that and realize that oh, not much there once we pull back the curtain.
Right. Yeah, I don’t know if you want to give a couple minute recap of what you found. And, you know, people were trying to make the argument that OSHA was following CDC guidelines, and OSHA has a general duty clause, where you have to keep employees safe. And then, bottom line is, you know, this is you, I can let you get the recap. But it doesn’t work the way people were saying.
Yeah, it unfortunately doesn’t. So that the bottom line of the argument became, every business in the country was going to qualify for ERC if this thing worked. So a tremendous result if we could get there, but unfortunately, if it sounds too good to be true, it often is. And that’s what I had to go down this rabbit hole to figure out, because I got this argument put in front of me, very well laid out, a lot of information. It’s the sort of thing that a client might feel very comfortable about, or even many advisors just wouldn’t have the knowledge or the bandwidth to dig further.
And so it’s a tough one. But yes, the core of the argument gets to the point that everybody qualifies simply because there’s a restriction on everybody. And these guidelines that OSHA puts out, make the CDC guidance mandatory. And that’s really the whole thread of this—because these federal agencies are requiring all businesses to follow these certain rules, then everybody has this suspension, and qualifies for the suspension test for ERC.
So it’s a very creative argument—I gotta give very high points for creativity. It’s well laid out in trying to do these things, but it ends up being a lot of window dressing, unfortunately, this OSHA argument. It doesn’t hold up, and in large part just because you don’t have the effects that you need. So in order to have any suspension rule work, there’s got to be two things that apply, you got to have first, an actual government order, right? We can’t just have this, just because we decided to shut down, we have to shut down something because of a government order due to COVID.
And so that was where this one falls apart. And I go kind of into the details of why it’s not a qualifying order in my article, but it’s not. And then beyond that, you got to have a more than nominal effect. So I always like to tell people, just the silly example of our you know, fairly good sized accounting firm here? Well, we were not shut down. We could work remotely. But what about if our accounting firm also operated a lemonade stand by the side of the road? And this is a service business that would be food that was not allowed to operate. Alright, that is absolutely shut down. Lemonade stand can’t operate because of COVID for a period of time. Does that then mean the whole firm is shut down? Well, of course not. That’s a silly example. It’s, we’re selling a dollar lemonade. It’s not a more than nominal effect, right is where the guidance goes on this issue.
So, yes, maybe if our firm also owned a full blown restaurant that was shut down, that could achieve those metrics that are there, and you go through those steps, that safe harbor they give us. But you have to have an effect, and you have to be able to show that it’s more than nominal on one hand and show that it’s related to a government order. And so even though we had one of these most well dressed arguments, OSHA, CDC, federal, everybody gets it. Great thing. If you’re a salesperson pushing the argument, it’s great. Everybody’s a customer.
I get the desire to get to a result like this. It just didn’t fall into what actually works, unfortunately. So that was an interesting one. I mean, there’s plenty of others. That was certainly the most involved, unique one that I’ve come across. There’s plenty of others. And we could get into—I’d be curious, maybe something that you’ve seen as well.
Yeah. So a couple of things on that point. One, just misinformation or confusion, when you just talked about the more than nominal effect, which is a 10% rule. You know, this restaurant that now Trout owns, was that more than 10% of my 2019 revenue overall, between the CPA firm and the restaurant? That’s a not more than nominal portion of your business.
The confusion is people think, “Oh, my client had a 10% drop in revenue, and so it’s more than nominal, so they qualify.” No, no, no, that’s not how it works, we have to look at the segments of the business and see if there’s a segment that we can pull out that exceeds 10% of your overall revenue. And your example’s great. You’re a CPA firm, and you own the restaurant, was the restaurant more than 10% by 2019. So that’s confusion.
And I shouldn’t say the funny thing, but I was just doing a webinar last Friday, and did this, I thought, really good example on how you know, “more than nominal” can come into play. And the very next question that came up was, “Oh, my client had a 10% drop in revenue, they qualify?” No, no, no! Segments! Let’s look at segments of the business. So it’s still confusing. And that’s why you know, people still need help. And that’s why they need help from people like you, and people like us that are going to do this right, because we’re going to take credits that exist and not credits that don’t.
So to your next question, and some horror stories that I’ve seen, and there’s been plenty—one that was really interesting: I had a firm that was—engineering firm, civil engineering, actually—and they were being promised about four and a half million dollars of credits. And the reason was, “Well, if Best Buy qualifies you qualify.” Like wait, what? Where’s the—I don’t see, I didn’t see that in the tax code that said, “If Best Buy qualifies, everybody qualifies.” And so that was just a little bit, and you know, that I’m getting the second hand from the client. So you know, it may not have been exactly what they were told.
But we had another one just last week. And you know how this works, you do math, you figure out the credit. Well, this firm had nine employees. The math never comes out—you know, the potential credit for nine employees is, is what, maybe $240,000 or something like that? Oh, if they qualified the entire time and everybody will qualify that the max. They were being promised $4 million of credits for this nine employee business. And so it’s just crazy. And part of it is just, I don’t know, greed, I guess?
I don’t know if that’s the right way to say it. There’s people that are pushing the credits that are probably based on greed. And the clients are like you said, the clients are expecting this person to come to me to be a professional to be knowledgeable to understand what’s going on. They told me I’m qualified, they’re the experts, so I’m going to do this. And that’s the greed part. The clients aren’t the greedy ones. The clients are relying on things. And so I get really frustrated with this, people promising credits that don’t exist. How about you? You got some interesting ones?
Oh, yeah. Oh, yeah. And I agree absolutely. The difficult part becomes the client that sees the next person. And now their buddy, business owner, “Oh, or this other guy I know. He’s in the exact same line of work, similar size company, he just got his money, but you said I didn’t qualify Mr. CPA. Why can’t you figure this out? My friend figured this out.”
And of course, you know, you and I know there could be any number of problems going on.
You think the guy that you know from the golf course, or that operates in the same industry, has a similar set of facts, but maybe his facts are different. Maybe he really does qualify. I don’t know that he went to, you know, some pop up ERC shop, and has a fraudulent claim.
That could also very well be the case. So I don’t know all the other things that could be possible with this, but I know your situation, and we’ve gone through in detail, and here’s why you don’t qualify. But that’s such a difficult conversation I’ve had—I’ve had some of those, you know, we’ve dealt with our own clients in helping them through this program. But there’s so much marketing going on. And it’ll continue now, you know. We have another three years really in statute to be filing these refund claims. So it’s not going to go away anytime soon.
It is marketing pushes that are going to be out there, and so we’re going to keep getting these questions, you know, “How did they get it and I didn’t?” And, you know, “Why doesn’t this work?” And a large chunk of that is, unfortunately, just bad claims that are happening. And I’ve seen some.
You brought up a great thing from your conference there, of the 10% rule being confused. And that seems like that’s exactly what happens in some cases. There’s all these, it is a complex program, there’s all these rules out there, that then it seems they’ve been synthesized and mixed together, just to get whatever the desired result is, you know, which, of course, the desired result is a credit, and a credit that an advisor can can then charge a fee for.
So the one that was a horror story recently was that “Yes, we know, Client, that you were not shut down.” “Okay.” “Well, we know you didn’t have a revenue drop, you grew.” “Okay.” A third party comes in and looks at the business and wants to qualify them. And, of course, the owners are interested, lots of payroll, lots of employees, they say, “Sure. Alright, tell me tell me how I qualify.” And they share a template with us that says “Break down your business into at least 10% segments—break it down however you want.” So far, so good. Until then, the next part of that template says “Alright, now if any of those segments dropped by more than 10%, that’s what we’re looking for.” Oh, no, oh, no, we’ve mixed our metaphors.
We’re not getting there, we’re looking at one rule, that should be the suspension test, measuring your business side, and we’ve mixed it with revenue drop, and there is no 10% revenue drop anywhere. So again, it’s an unfortunate mix of of things that are going on out there, and a lot of confusion, a lot of unknowns, and, unfortunately, it’s just too complex of a program that even the professional community that is trying to do the right thing, can’t always sort through all the weeds of these things. And we’ll have a hard time if someone’s coming up with “Oh, here’s the claim I did,” they may not be able to recreate “Well, what was this legitimate or not?” So it becomes a difficult position. And that one recently was a good example of that, somebody just threw rules into a blender, right? And got whatever best result they wanted out of there.
Yep. And there’s been things, more guidance that has come out. And in reality, you know, the guidance was there from the beginning, really, you just have to dig deep into the tax code. But when we get IRS interpretations, obviously, then, you know, their notices give us more information.
And one of the things you were on top of earlier than I was was the whole “More than 50% owner wages not being able to be used in the calculation of the credit.” And to me, I think I knew it, but it just didn’t make sense to me. It was hurting the mom and pop business. You know, it was more like, “Well, why would IRS do that?” But they weren’t. Congress set the rule. They pointed at the tax code, and the tax code said that. So I think you were one of the first that basically said that this isn’t gonna work, right?
Yeah. That’s a part of the claim to fame, I think, around the ERC for me, was just pushing this. But honestly, I gotta blame one of my partners here at the firm who just, who kind of grilled me on it and said, “Dan, do we really understand these related party rules? What about this, you know? This language is confusing. We really need to make sure we nail this down before one goes out the door.” And now he doesn’t even remember that—he’s just one of these guys all the time. And unfortunately, this one ended up with an unfavorable result for everybody.
But I agree with you, it’s one of those that doesn’t make sense. It’s the tax code caught in itself. And when you follow the text of what it is, it’s there, and the IRS didn’t deviate from it. It’s a tough one. It’s one as I stand back and look at it, you kind of understand that they couldn’t unravel it. You know, short of legislative fix, they couldn’t look at it and say “Well, we’re going to ignore it for owners but not for others.” How do you use part of that code as it is without ignoring the whole thing to get the right result everyone was asking for? You’ve just got to eliminate all related party limitations to get there. So it was a tough spot they were in for sure—something that didn’t exactly make me popular as others disagreeing all along, and some that still push against it, and still say, “Oh, yeah, this is okay,” or, any claim filed up until last August when the IRS guidance put a pin in it, they say “Oh, all the claims before that are still fine,” and I just scratch my head. It is what it is, unfortunately. It wasn’t wasn’t exactly a beneficial issue, but it was an issue that I was just glad to be able to dig into, and we are actually filing them right.
Because if I hadn’t been the one to dig into it, then it would have just been somebody else. I’m sure it would have [come] out, all the focus on this that happened, it would have [come] out there. That was back in February of last year that really got pushed to the forefront then. So one way or another, I’m sure that issue would have [come].
So when did the—what notice did their interpretation come out? Was it 23? 2021-23 they clarified the owners? Or was it 49?
Oh, that was the 49, yeah. That was August.
Okay. So that was late in the year, yeah. That’s what I was thinking.
I mean, everyone’s got their hands up and saying, “Well, the IRS, you know, this has been out since the Cares Act in March, and how did it take them this long?” And okay, yes, I get that. The thing I’ll always say in response is just, “They didn’t know this was an issue, so there wasn’t guidance around it until it became an issue.” And the AICPA there at the end of February, then, as it exploded in the tax professional community of, “What do we do with this? This can’t be right,” you know, because there had been claiming owners before that there hadn’t been any push to question it before then.
So it wasn’t until the AICPA raised that issue then for the community. And I think it was a February or early March letter, that they asked for guidance. So I look at and say, “Well, hey, this was the IRS, and so from March to August, they got that guidance out? Actually, that was probably one of the quicker turnarounds we’ve seen out of the IRS in recent years.”
Well, yeah, you and I have seen their processing times on the ERC. And that’s much slower than that took them.
Indeed. 941-Xs do not turn around as fast as the guidance did even, so.
And then that’s what we were seeing, you know, nine months at the beginning. Our team that deals with 941s told me they’ve seen a little bit of a truncation of that time there. Have you seen them come quicker now after tax season?
I think probably a little bit it’s not perfectly consistent further through the grapevine that those over six figures get held for further review and are slowed up.
We’ve been estimating originally, like four to six months, because it was always two to four for paper returns prior to code. I said, “Well, four to six months since we have no idea, right?” And very quickly that became, “Well, it’s six to eight, is really what we’re seeing in reality.” We did break a record though. There was one filed earlier this spring, that was a two and a half month turnaround. So I don’t know how that sneaked through.
That’s good. Yeah, there seems to be no rhyme or reason on these except that, like you said, the 100,000 and above, we heard the same thing that they are going through a secondary review.
Yeah. We have some that are coming up on a year, which are unfortunate, right? But I’ve tried to tell clients, brace for up to a year, even in these cases, just don’t go spend the money until it arrives, which is unfortunate. And it’s really supposed to be relief money, so it’s sad that this is the process that we’re stuck with and the slow administration. So it’s a bit unfortunate that the toughest part of that too is you’re kind of helpless. You can see what the status is if it’s been received or assigned. But there’s nothing a practitioner can do to expedite.
You got the Form 8821, or whatever, where you can go in then and look in?
Yeah, we’re doing the same thing. So we’re at a minimum, saying that if it’s not—if we don’t see receipt in four months, and we were told this from the IRS, I think—if we don’t see that it’s received within four months of filing, that we need to file it again. And so that could cause some problems, too, but that’s what we’ve been told.
Yeah, it’s been a bit of a nightmare on administration, and there’s no relief. Even the Taxpayer Advocate Service, which you would typically get that arm of the IRS involved, if issues go beyond a year without an IRS action, they’re not taking refund cases. And we’ve seen that in other tax types, too. So they’re still not operating the way they should. So there’s no backstop, at least at this time, to be able to accomplish that.
It’s unfortunate there. We’ve also had some come back. I’m sure you’ve seen some of those where there could be clerical errors. We’ve had a couple, out of hundreds, so it’s a low rate, but I know there’s others that have gotten frustrated, and refundable / non-refundable portions, throw in some of these. But even more than just the clerical pieces of how it was filed, there’s just been some bad processing, you know? It’s a manual form, IRS manually processes it, so they’ve just come back with some that are flat out wrong, and we have to refile or try to call. The calling hasn’t been super successful.
It’s unfortunate. We had one case that was a mixed bag to say the least, where they filed three separate quarters for the same client, and we picked up the case afterwards. And it was prepared incorrectly by the other preparer, but we were tasked with “Hey, let’s figure this out, let’s fix this.” They filed the three quarters the same wrong way, they didn’t divide the refundable correctly, things were off. But the IRS processed and paid one quarter fully, they processed and paid just the refundable portion of another quarter, and then a non-refundable was not there, and then the third quarter they just denied it flat out, said “You need to refile.”
So, the same issue, same company three different quarters is handled three different ways by the IRS. And that’s kind of just the calling card for this program. It’s such a tricky administration, manual administration, and very, very frustrating and hard to communicate that to clients sometimes, that we can only do so much. “This is now in the hands of an IRS that’s really struggling.”
Yeah, we’re seeing the same thing with very—not a ton, a small percentage, but we’re seeing the miscalculation, we’re seeing where clients have tried to do it themselves, same thing, we try to fix it after the fact. And we’ve seen where IRS has lost them. I mean, it’s just, they’ve lost them, it’s gone.
And so I guess that brings me to a good point, then: Because of that—and again, that’s a small portion of the overall credits that are being claimed—but you know, we’ve got this rule that says that we have to adjust the income tax return, we have to reduce the expenses by the amount of the credit, the year that the wages were used or incurred for the credit. So we have a 2020 credit, we have to adjust the 2020 tax return. The problem with that is taxpayers are going to potentially, you know, you’d have a million dollar—that’s a big credit for 2020, but you know, let’s assume. You have a million dollar credit for 2020. I’m gonna increase my taxable income by a million dollars, I pick a 30% bracket. I owe $300,000 in tax on money if I file that 2020 credit today, I’m not gonna get that money for nine months, and all of a sudden, I have a $300,000 tax bill? And in addition to that, what if there are mistakes? What if IRS sends us the wrong thing?
So we’re in the middle, and you are too right now, of just advising people what they need to do when they need to amend their returns and what they do about paying tax. I don’t know if it’s fair to ask me what your opinion is on that, or I could go on ours first. Whatever you want.
Sure. Well, I mean, it’s a tough rule. It’s one the AICPA lobbied to change, but it’s a statutory thing, that the IRS I don’t really think has the discretion to give that relief. It’d be great if Congress could do something with that, or at least just say, “Picking it up in a later year is fine,” and we can avoid some of this nonsense.
But no, I try to console clients. I try to say, “Hey, at least they’re gonna pay you interest on the refund as well. So you’ll get some benefit of this money coming later. And they’re paying a decent enough rate there, you know, that doesn’t make us feel perfect, but at least this should catch up at some point. You know, worst case scenario, you’re sitting and filing and you don’t have the funding, you don’t have the ability to pay, and so you’re on the other end, you’re paying some interest until that money arrives to catch up and do that.”
So I typically don’t recommend that. I think the IRS is a bad lender, you know, we don’t want to be in debt to the IRS if we don’t have to be on these things, but a small price to pay in the grand scheme of getting this relief money.
And that’s where some of these conversations surprisingly, get to that point, “Oh, do I really want to claim this money if I’m getting taxed on it?”
Well, it’s not the full dollar. Even if it costs them pain and headache in between, you’re still coming out way ahead.
It’s hard to be eligible and not have this program be worthwhile, right? You’ve got to have a unique situation. I could count on one hand, the number that I’ve talked to, that we’d ended up not moving forward for just a reason that it wasn’t practical for them, right? The numbers get so big so quickly, that that’s usually—again, very few that it wasn’t ending up being worthwhile for.
So, and that’s also why we run into all these problems though, with people being really aggressive. The numbers get really big really quickly, charge a percentage—
And people are hungry to sell them, you know? They’ll be willing to do and say anything to get that next commission on these and that’s unfortunately, where a lot of these come to, and then we get in the crosshairs as professionals, they say, “Hey, you said I didn’t qualify for this. How do you explain this?” And then, “Well why don’t I just do this anyway, because they’re gonna give me this audit protection. So even if it is a little squirrely I can just do it anyway, right, and that’s no problem, they’ll protect me down the road and I can just pay it back.” So it’s an uphill battle that we are stuck with as advisors, and it’s not going away anytime soon.
No, it’s definitely not. And like you said before, I mean, we honestly have 35 months yet, just short of 35 months before the final amended returns. And that 35 month timeframe is every single one of our 2020 amended 941s are not due until April 15th of 2025. And I didn’t know this originally, I thought it was three years from the time you filed the 941? Every 941, the IRS assumed is filed on the April 15th, after the tax year—you know, so 2021 941s, IRS assumes the statute starts on April 15th of 2022 for all of those. And I didn’t know this was the case—I thought we were going quarter by quarter. And so unless I’m misinterpreting this, I looked at, right off the IRS website, they even have a video on it, that this is when these are due. That’s much longer to file all of the 2021s than I expected. So yeah, this is not going away.
And you know what’s gonna happen. You, since you’re in the middle of tax season, in the tax season of 2025 and 2024, you’re gonna get tons of clients calling you because there’s gonna be a big marketing push on clients again, to take it, because now it’s about to expire. And you’re going to be answering questions in the middle of tax season left and right at those two deadlines.
Yeah, perhaps. I’d like to think at least we’ve combed through our own lists so well and covered our bases that we’re finally seeing that slowdown. We had held off on all our ‘21s, because of the interplay between the programs—you couldn’t really maximize them until you got past the third quarter of 2021. So last fall, and through the beginning of this year was incredibly busy to file these, and now we’re just down to the stragglers, we’re down to the late ones, and those trickling through. So it’s been a bit of a reprieve from just that push through all of last year on 2020s and ‘21s ones in the fall.
So at least I’m seeing some wind down. I’d like to hope there aren’t too many out there that are all just going to pop up at this point, at least not within our own clients. It’s funny you say that—there was actually another bit of misinformation last fall where there was the push that “This program is expiring,” right?
“It’s the third quarter, this program is expiring at the end of the year”. And it whipped everybody into a frenzy. I think it was in December.
Yeah, it was.
“This is expiring”—it is the sales tactic. “We just want to try to get people to sign on and engage with us, so hey, this is expiring, you got to do this now.” And so that got me riled up a little bit because I was actually receiving that from multiple clients—
as well as other practitioners around the country that I’ve communicated with. And this is something you can amend tax returns for a long time. This is a sales frenzy. But whoever that originated with, it made its way out and just spread like wildfire. It’s amazing how this information can really be whipping around.
It was funny, because I was getting [those] same phone calls nonstop: “I’m about to lose this. We have to do it now.” And it was so often I tried to figure out where this was coming from. I found one article written by some association, let’s say it was the Dental Association. There’s something that actually quoted that in there. And so I don’t know if that’s where everybody got it, but that’s the only thing I could find that mentioned that that was the deadline. So sorry, Dental Association, it probably wasn’t you, so I’m not blaming you. But it was some association’s magazine that—I actually don’t think I have too many people from the Dental Association that’s listening to the podcast, so I probably didn’t have to apologize to them—but that was the only thing I could find. And I’m glad that that one is no longer a key issue that we have to deal with.
Alright, so then one last thing I want to touch on before we wrap up today. And boy, like you said we could go for hours, I’m sure, and then you know, after we finished recording, maybe you and I will just keep going for hours. But, just curious—I did one of my webinars I did in the last two weeks, both webinars actually, I asked people if anybody’s seen an audit yet. Because we haven’t, and we’ve filed, I mean, we’ve probably failed 5,000 941-Xs—I don’t even know, we’ve filed a lot of them. And we have not seen an audit.
Now I asked on one webinar, and I had like 8% of the people respond—it was a polling question—that they had. Ended up, I’m pretty sure they were all notices that they had seen, unfortunately. But last week, I did another, and I asked the same question, and one person responded with an email that they have seen an audit. I didn’t get all the particulars, but she actually sent me an email yesterday and said “Yeah, give me a call, let’s go over this. So I’d like to discuss this with you.” So I’m pretty interested to find out what happened in this audit. So, but have you seen anything from an audit standpoint yet?
Just notices for anything that we’ve been involved with. I’ve heard of one now, just through the grapevine, from another practitioner for a relatively small ERC size. But they’re coming, right? I mean, these are going to be big. So the IRS, you know, they want to put their effort where the dollars are, and these are big dollars. So the return on audit hours is gonna make it a hot area. And, you know, some of the things we’re talking about, some of the nonsense that’s going on out there, fast and loose, aggressive positions, these are going to be ripe.
If I was an IRS agent, I could just sit back and run ERCs by industry code, and some of the industries they know aren’t shut down, or maybe in a state that was very clearly not shut down, you know, it’s going to be easy pickings, because I might just retire from this role here and go work for the IRS. And if they paid me on commission, I’d do fine for a couple of years here. Because it’s not that hard to try to spot some of these at a high level. So I know they’re coming, and I know also they had really pushed in their training, so they had been preparing for this. And I think it was early through this year that they had been training audit staff. And we had heard a little bit from an IRS spokesperson about their efforts in training and preparing for these audits that would come.
The statute isn’t super long for these, so it will be pretty concentrated in the next few years. But we do have some the third and fourth quarter of ‘21 is the extended statute that was changed with that last law. So some of these are going to be at risk for much longer. But at the end of the day, It’s like most of the work we do. I’m not so worried about the audits, right? We’re only filing these in a way that I’m stepping in, and I agree they’re ready. So I’m not necessarily worried about it. I hope they don’t happen for our client group just so we don’t have to go through the rigmarole of providing it all, and the headaches, but we’ll be ready.
And that being said, does the IRS know who filed the 941-X, or who prepared it? Oh, yeah, we’re signing that. Yeah. I think that in the long run it could become a positive because “Oh, wait, you know, Dan signed this. It’s good. Let it go.” Or “Tri-Merit signed this. It’s good. Let it go.” Compared to “ABC Company that we know every audit we go to, we’re getting money back.” Maybe that’ll happen.
That’s a very interesting point. It’s unfortunate, though, because I know some of these problematic positions that have come up and then I’ve got sent to me by other practitioners and talking to them—it’s because it’s third party, work with a client, prepare something, they bill them for it, they have this number, and then they turn it around to the payroll process or turn around to the CPA and say, “Hey, you file it.”
Yes, I’ve seen some of these.
So it’s probably the most problematic outfits aren’t putting their names on these at all, so it could be a little bit harder to track. For any that are, that is something the IRS does. We’ve seen that with other enforcement actions where they’ve wrapped in all clients that are related to a certain promoter. Another payroll tax scheme that we’ve [run] into, we’ve [seen] that and how they were able to sweep this up, and it’s been a decade long enforcement action. So this one, I don’t know if it’ll get that sophisticated with the shortened time frame that they have, and such a big pool to go after, and just the fact that some of these are just not putting their name on it right now, they’re making it harder to find them.
No they are not—you’re right. I forgot about that. They are, their contract says, “We’ll give you the numbers, you file the returns, you prepare the returns” even I think in some cases, which, that alone, is complicated. Because the 941s have changed. I mean, every quarter is not consistent, or the -Xs have changed. You have to change the way that you present these many of the quarters.
Yeah, those worksheets change by the different year, by even the first half of the year here in ‘21. Even our seasoned payroll professionals, you know, we’ve got to sit down, really careful with our templates, and have multiple levels of review just to make sure we sorted out those problems. So that’s why, you know, when I got a phone call yesterday from a client saying, “Hey, you think it’s okay, then if mine is pretty simple, if I just file it for myself?” “Oh, no, I can think of a lot of different reasons. I spent too much time in this program to advise you to just try to do this yourself. Even the 941 alone, don’t don’t do it on your own. It will be wrong. I can’t tell you exactly how, but it’s not going to be right.”
Oh it will. We had a client, one of our people reached out to, it was just last week, to say “Hey, you know, haven’t heard back? Do you want us to, you know, do this analysis for you?” And the CPA was pushing for us to do this, you know, for us to do it, not the client and the client said, “Oh, we just ended up doing it ourselves and filed it,” and I’m like, “Oh, no, that’s not going to end well. But I guess we will help them after the fact. I suppose that’ll happen.”
But alright, Dan, we should probably wrap, but like I said, you and I could talk all day. Any final thoughts, or?
Well, I think for this program, things might be winding down. I mean, you brought up Tax Twitter, it’s something I’ve preached there, and if we have professionals and CPAs listening, something I’ll preach here as well is, “Let’s all help each other.”
There’s no need to feel like this is a competition and that it’s, you know, that you can’t ever refer something out for something unique like this. And I’ve pushed that—I’ve seen it a few times where just smaller shops or solo practices that don’t have the capacity. It’s been a tough couple of years, they just couldn’t handle another thing, and so they’ve maybe ignored it for their clients or just not given it the full look that someone like you that’s spent so much time and you’d be able to look through those and see it much better.
So I’d just encourage people: It’s okay to help others, and it’s okay, if you’re not doing these, to have, to partner with someone else to come in and look at it. We do have lots of time to do these things. And don’t call me—I mean, we have enough work, but—
Well, they can call us.
But yeah, everybody knows that there’s another shop down the street that probably needs help. And talking to them, talking to your competitors—hey, you know, this is something, do you really want all these emails and all this stuff that’s going to come out, all this nonsense from pop up shops that are selling these things for far too much for all those risks—do you really want them to be the ones that are in front of your clients over the next few years? Or somebody local, some of you trust somebody that will agree to partner with you and not try to steal all the work, but just help you with this because you can’t handle it yourself?
Those are great conversations to have. And we don’t always have to be butting heads as CPAs. I’d much rather keep seeing the profession helping each other even across firm lines. That’s a healthy thing for all of us. I think we all do better the more we help each other regardless of who they work for.
I agree completely.
But get out there. Help the others.
It’s like you and I are the same person. I agree completely. That’s awesome. Alright, So one thing—I don’t want to neglect this—one thing I like to do, and then we’ll get some contact information from you. But before we do that, you’ve been, obviously you are a CPA, you’re in a CPA firm, you’ve been extremely busy for quite a while—what, three years of nonstop tax season now, pretty much? But you have to have something you enjoy doing outside of work. What are your outside passions that you get to enjoy?
Honestly, the thing that sucks up all my time is my four year old and six year old. I have a boy and a girl, and boy, tax season wants 150% of you, and the kids also 150%. So trying to make that divide is fun. But we get out—we love our trips. We love our day trips, our vacations. So all the time I can spend with my close family and extended family is my happiest time spent.
Nice. That’s a great answer. And then if anybody wants to know anything more about you, I assume Twitter’s a spot they could go but how can they find out more, get in contact with you?
Sure, well I’m on Twitter, ranting there from time to time @DanChodan. Trout CPA, of course you’ve mentioned, is the firm where I’m a partner here. And then some of my articles on ERC have been published. I’ve been contributing to Think Outside the Tax Box, great little subscription service going on a couple years old now. So a great bunch over there that I’d encourage everybody to check out as well.
Alright, Dan. Well, I really appreciate you sitting down and doing this. And it’s great to have a conversation with a fellow ERC geek. So thank you.
Indeed. Thank you, Randy.
About the Guest
Dan Chodan is a partner at Trout CPA in Pennsylvania, having joined the firm in 2013. He currently serves on the firm’s Auto Dealerships and Manufacturing Practice Groups, but is likely better known for his high level of expertise on the Paycheck Protection Program and Employee Retention Credits that were introduced as part of Covid relief legislation in 2020 and 2021.
Dan handles all aspects of tax planning and preparation services, including monthly close consulting, year-end planning, and financial statement and tax return preparation.
He graduated magna cum laude from Maranatha Baptist University with a Bachelor of Science degree in Accounting. In his free time, Dan enjoys traveling and attending community events with his wife and two children.
Meet the Host
Randy Crabtree, CPA
Randy Crabtree, co-founder and partner of Tri-Merit Specialty Tax Professionals, is a widely followed author, lecturer and podcast host for the accounting profession.
Since 2019, he has hosted the bi-weekly “The Unique CPA,” podcast, which ranks among the world’s 5% most popular programs (Source: Listen Score). You can find articles from Randy in Accounting Today’s Voices column, the AICPA Tax Adviser (Tax-saving opportunities for the housing and construction industries) and he is a regular presenter at conferences and virtual training events hosted by CPAmerica, Prime Global, Leading Edge Alliance (LEA), Allinial Global and several state CPA societies. Crabtree also provides continuing professional education to top 100 CPA firms across the country.
Schaumberg, Illinois-based Tri-Merit is a niche professional services firm that specializes in helping CPAs and their clients benefit from R&D tax credits, cost segregation, the energy efficient commercial buildings deduction (179D), the energy efficient home credit (45L) and the employee retention credit (ERC).
Prior to joining Tri-Merit, Crabtree was managing partner of a CPA firm in the greater Chicago area. He has more than 30 years of public accounting and tax consulting experience in a wide variety of industries, and has worked closely with top executives to help them optimize their tax planning strategies.