Examining the Do’s, Don’ts, and the Misinformation Epidemic
The Employee Retention Credit continues to be a hot topic in the accounting space, so Randy Crabtree gets together with Nick Pantaleo of Tri-Merit, Dan Chodan from Trout CPA, and Chris Wittich of Boyum Barenscheer. They touch on the dos and don’ts of the ERC, with a focus on the slew of misinformation on the topic—some of which has been pushed by pop-up ERC “shops” looking to profit off the opportunity, with little regard for whether the claims are proper, or even free of fraud. They conclude with some sage advice about how to keep your clients—and their books—above board.
Thanks everybody for tuning in today. I just wanted to give you a quick update before we start today’s episode. We did release an episode on the Employee Retention Credit. That episode with Dan Chodan was actually recorded about six months ago, and a lot of things have changed over the last six months, so we wanted to get a new episode out. Today’s episode is also about the Employee Retention Credit. Dan’s back with us today, with two other guests, so let’s get right into the show.
Today, our guests are—multiple guests today—Dan Chodan, Chris Wittich, and Nick Pantaleo. We’re doing a pretty interesting show today. I’m really looking forward to it. We are going to be discussing the Employee Retention Credit or the Employee Retention Tax Credit, whatever you—ERC or ERTC—whichever way you say it. I’m an ERC guy. We’re going to talk about that, we’re going to talk about a lot of things that are going on. You’ve seen a lot, you’ve heard a lot. There’s a lot in my opinion—I’m guessing these three will all agree—that there’s a lot of misinformation, and not only misinformation, there’s a lot of—I probably won’t go too harsh on my verbiage right now. But there’s a lot of probably incorrect ERCs being filed.
And so we’re going to talk about that. Hopefully we’re going to give you some information that’s going to help you when clients come to you and say they just got contacted on the ERC and hopefully help with that. So normally I do an intro. Today I am going to have these three introduce themselves—and just a quick who they are, where they work, what they do, and maybe a little story about how you got involved with the ERC too.
So, Dan, since you’re a second time guest—in fact, your episode was just released, I think a week or two ago, even though you and I recorded it about six months ago—this episode, I’m going to push out fast. So hopefully it’ll be out in the next week or two. So Dan, do you want to give us a quick introduction to yourself?
Sure. Yeah, that episode, I think we were already talking about some of the nonsense and headaches and I think in the time since we’ve recorded to release it just has accelerated tenfold. It’s gotten real interesting out there. So yes, I’m Dan Chodan, partner here at Trout CPA headquartered in Lancaster, Pennsylvania. Been doing a lot with the ERC program. It’s kind of been taking over my life here for the past couple of years—I’ll be happy when we can finally roll past all this stuff, and put it into the old memory bank, never to be used again, hopefully never used again, hopefully no recurrence of this sort of pandemic.
But it’s been exciting. It’s been fun. It’s been great to meet some great people, including yourself Randy, Chris, and others in the professional community as we’re fighting through some of these complex topics on it. So that’s been really exciting. And it’s just really, you know, the culmination of a lot of different tax topics, existing tax code that roll into a new program, and it’s just kind of a nerdy, fascinating thing for me. So that’s enough introduction. I’ll pass it off.
Yeah, well, no, I appreciate it, and that interplay with existing and new tax information, you’ve been on top of that, and I’ve appreciated what you’ve done on that. So well, Dan, thank you for that. Chris Wittich, we are going to go to you next.
Yeah, thanks for having me. I’m a partner at Boyum Barenscheer, which is a firm in Minneapolis, Minnesota—about 130, 140 people. And, you know, when COVID started, I was sort of a tax technical guy, and seemed like a good fit to head up the COVID team. Did that starting, you know, March 2020, and we didn’t do any ERC in 2020. I really, you know—we looked at it briefly and decided it wasn’t worth it for anyone. So then, you know, January 2021 rolls around, or December 2020 when they passed the bill—I looked around at our clients, and I work with a lot of hair salons, and that seems like a real good fit for ERC. And there’s another partner in my office that works with a lot of breweries and restaurants, and that’s a real good fit for ERC. And so we started there. And yeah, we’ve done quite a bit of ERC and certainly expanded beyond those two industries, but that was sort of the first impetus.
Right! I’m not sure that we’ll ever have regular work again, but so you got involved about the same time I did. I think I remember the date—January 7th of ‘21, is I think the day that I got intrigued with the ERC, which is right after the, what was it, the Consolidated Appropriations Act that made the major changes, right? Yeah. So you, 2020, pretty much ignored it because of the PPP. We didn’t we weren’t doing it because everybody got PPP.
How in the world did you get rid of all your other work? I didn’t get to 96% ERC for the last two years. I just did it on top of everything else.
Well, I delegated. I delegated, and part of it this year was that we knew we’re going to have a baby—that was planned. And so I knew I had to get off of stuff, A, because we had all the ERC—I mean, in 2021, I sort of did all my regular work plus the ERC. In 2022 it was like, “Alright, I know, there’s gonna be more ERC to do. I know I’m gonna go on leave for a while. So we got to delegate this stuff.” And, you know, I hired a great tax manager, I was able to get him to do a lot of stuff for me, which is super. But yeah, it was a struggle to get all the, you know, get everything delegated.
Hey, credit to you. That’s what we’re always supposed to be doing, and say I’m supposed to be doing, and I somehow just doubled up instead. Oh well.
Alright, so Dan, and Chris, I’ll come back to you in a second, so Dan, I’ve got a new presentation I do. It’s about stress, burnout and mental health and our profession. I think you and I need to have a little discussion if you’re working double hours here with your ERC load and everything else. So we might have to talk offline and make sure everything’s okay. You look great, so.
You know, in this profession, Randy, you’re just supposed to, you know, you get it, and then you keep it for life. That’s the rule, right? We just ignore delegation. No, it’s been a process. But I’ll be happy when I’m not doing so much of this work too, because it’s a lot.
Well, we got what, a year and a half until 2020 runs out, and two and a half years until ‘21 runs out? So we got a little bit of time left. But we’ll see what happens. Hopefully, the interesting things we’re dealing with right now will kind of wane a little bit over time.
Alright. We don’t want to we don’t want to miss Nick Pantaleo. But Nick, can you introduce—I think this is first time guest for you on the podcast, isn’t it?
This is the first time on the podcast.
Alright. You’ve been on webinars that I’ve run in the past, or you’ve helped me with as well, but podcast, first time. So Nick, why don’t you introduce yourself and your ERC role and how you got involved?
Sure. So Nick Pantaleo, I’m the Controller at Tri-Merit. And really, that job, Controller, just comes from the fact that I put my hands in a lot of different things. So naturally, when ERC came up, we were looking at building out our product, you know, this line of business, I was kind of put in charge to help them figure out what’s the best way to build the model for looking at PPP and ERC together, to make sure you’re not double dipping, and everything like that.
So that’s kind of where everything started with me, and then, you know, helping you with webinars because you’d love to double book yourself and overload yourself everywhere. So you should probably take a look at that mental health presentation. But yeah, I mean, that’s, I pretty much got roped into it. Just helping get everything going to make sure we’re doing everything properly.
Yep. And you called yourself “Controller” but technically, January 1st of ‘23 you’ll be a Partner with Tri-Merit.
That was announced a week or two ago. So congrats on that.
So we’ve got a group of partners here! Look at this high powered podcast today.
Alright, so let’s just jump into this. I teased the ERC information, and you know, that we’re seeing some things going on out there. But before we get into even like the misinformation or the horror stories or everything else, I’m going to start with Nick, but if you guys want to jump in afterwards, that’s fine. Because Nick just talked to the IRS last week, and he got an update from them on processing. And so Nick, you want to give us, well, do you want to give us like what we’ve seen, and then maybe Dan and Chris have seen something different but what we’ve seen from the amount of time it’s taken processing and then give us the update they told you last week?
Yeah. So I mean, I don’t know about you guys, but we’re seeing it actually pick up quite substantially on smaller credits, and we’re seeing clients under a couple hundred thousand for a quarter, where they’re getting paid, and we’ve seen as quick as two months, but usually like that two to four month range now with the smaller ones.
But for those longer ones, and I’m sure you guys know what this is about—those ones where they say anything over 100,000 in a quarter is subject to extra review. And it goes in this longer time frame. For the longest time they were trying to tell me it was gonna be nine to twelve months. On the most recent call, they literally said “There is no timeline. Yeah, it’s there. Like, we’re backed up, we can’t tell anyone anything and if anyone calls and asks we’re pretty much going to tell them that It’s in review, try back in 30 days.”
So that’s where we’re getting right now. We’ve seen a couple big ones that have gotten paid, like at month 13. And the one desk review that we were talking about offline, but in the transcripts is showing a desk review, that incurred at month 14. So I’m guessing maybe there’s something there. Maybe not. Maybe it’s gonna get longer. But are you guys seeing something similar with a lot of those larger clients? Are you seeing them even get paid?
Yeah, it’s definitely been a mix—I agree. There’s been some speedy smaller ones lately. That had been the outlier. I think it was earlier this year, I saw one paid in three months, and that was just amazing. And that was the first one paid in under six months, just an outlier. But now, there’s been a few flying when they’re smaller. You know, there’s been some big ones that have still been paid—the size doesn’t seem to just mean they’re all frozen. But it’s the biggest ones, certainly, that are slower. And now we’re starting to see some that are going over a year that were able to try to have the Taxpayer Advocate referral in there—not that it seems to really be doing any good, but that’s, you know, what you’re supposed to do over 12 months of inactivity, right?
So I don’t think it’s really going to be going anywhere, except maybe some of these that are sitting without any communication might finally have some IDRs flying out, right? And that these audits will get started. And I think there’s a holding pattern, while the IRS agents are getting trained for these audits, right? I’ve been told by an agent that a number of these were assigned already, and just waiting for people to actually be trained and get their bucket filled up with these. So I imagine there’s gonna be a lot more activity over the next three or four months in that regard, as we’ve heard the 300 auditors that are specifically trained on this program. So it’ll be interesting to see.
What about you, Chris, are you? Are you seeing about the same things or anything different?
Yeah, pretty similar, I would say like two to six months on the small ones. And we define small as a hundred grand or less in a quarter. That’s not exactly the threshold, but it’s like around there somewhere between a hundred or a hundred and fifty, it seems like. And our large ones, it’s pretty hit or miss. Some of them are getting like partial, like they’re getting two quarters, but they’re not getting the other quarters; we’ve had, you know, I think our oldest one is probably 17 months old now, 18 months, maybe. Because we didn’t really file any in early ‘21—we waited until, I think May was the first ones we started to file, and some of those have not been paid, so that’d be about 17 months.
You know, and again, there’s like no update—we don’t even really… there’s no point in calling the IRS. If it’s 12 months old, or 14 months old, like, you can’t make them go any faster. So you’re just sort of spinning your wheels. But we are starting to really try and follow up and call on the ones where it’s like, “Alright, first quarter and third quarter were paid. What happened to the second quarter? They’re all about the same size. But second quarter, it seems like it’s missing.” So certainly a lot of notices about you know, IRS hasn’t processed the original 941, and we’re like, “I don’t know, how is that even possible at this point?”
So pretty hit or miss and, you know, lots of exceptions, which makes them not really exceptions. But yeah, I know, in the last couple of months, we’ve seen a few process right at like eight or nine weeks. And we’ve been like, wow, I hope that keeps up, knock on wood.
Yeah. So everybody’s kind of seeing the same thing out there. We know audits are coming. We haven’t seen them. It sounds like Nick, you think we’ve got one that’s in the works, but we haven’t received notification yet?
Yeah, no official IDR yet. The transcript system essentially says examination—it first said “examination requested,” now it says “examination in process.” That was, you know, the first week of September. So it’s been sitting in that stage for two months now. So I don’t know if it’s an official audit, or if that’s just a desk review that they keep saying that they’re gonna be doing, and that’s what it is. But I’m waiting on the IDR. I told the client to look out for it.
Even if we haven’t seen it, has anybody seen an IDR in general from someone else yet? We did Nick, how about you guys? Dan, you’ve seen one? Are they consistent? Or is each one individualized?
I think what I’ve seen and also just heard from other practitioners is that it’s just a blanket list of anything that you could possibly ask for that’d be related to this program. And from what we’re hearing too, it’s pretty few and far between. An agent told me it was just the pilot program to start here, so that the actual bulk of the trained agents—and that wave isn’t here yet. So anything that’s out there now is just the small wave before the big wave. So it sounds like so far, it’s just a big blanket and nothing’s moving. I haven’t gotten an insight from anybody who’s seen these so far. It’s just a slow slog, which is no surprise for the IRS.
Okay. And so that’s why I wanted to do a quick update, give some real information before we jump into something else. But I think that audit is probably a good transition point, because there’s going to be audits. And in my opinion, audits are pretty easy—one to identify who to audit—but two, once you get into the audit, I think it’s pretty easy to determine yes or no overall.
So part of that is because this is fairly, at least, I think we all agree, I think it’s fairly cut and dry, how you qualify and how you don’t qualify—but there is some gray area. One that I think is used more than any—not, I think between any of us—but is this whole supply chain fiasco that’s gone on in our country for the last, you know, year and a half, two years, and using that as a—I shouldn’t sway the opinions here, but I think you all probably have a good opinion on this—using that as a scare tactic to say “Hey, you got this money sitting here, and you had supply chain issues, so you qualify. Let’s do the ERC.” Chris, do you—what’s your opinion on supply chain? And have you been able to qualify anybody out there on supply chain?
Yeah, I do think I have a difference here with Dan. He seems pretty against the supply chain argument. I am against the blanket application of the supply chain argument, and I do think it is a difficult argument to make, but I think it’s possible.
So when I say “I think it’s possible,” I mean, like, we’ve done something like 500, and I think we’ve used it two times. So it’s a small, small portion. And you know, maybe I’m about to do a third one here in the next month or so, but I think the blanket application is where you go wrong. And, you know, I get that it’s a layered approach to get down there, but I look at it and say, if I can basically qualify the supplier itself for ERC—based on the government orders in their jurisdiction where they are, you know, generally speaking, manufacturing something—then my client who’s receiving the goods from that manufacturer, I think that’s the argument for the supply chain.
That’s tough to make happen. And it’s tough to get down to the supplier level and get them to kind of play ball. Because if your client is, you know, just a small fish in the pond, they’re not even going to reply to you, much less, you know, play ball and really figure out why there was a disruption. So I think the supply chain argument is tough, but I think it’s in theory possible. And in practice, we’ve used it once or twice.
I agree with you on that. In theory, it’s possible. I would go a step further—and you might do this too. You know, if I could have the supplier itself was affected? Okay, great. If I could prove that, great. I haven’t proved that. I don’t know, Nick, have we proved that at all with any of our thousands that we’ve done?
I think maybe one, maybe one or two.
Okay. So, but then the next step, and I think it says it in the FAQs or one of the notices, that “Hey, you have to also prove that they couldn’t get the supplies anywhere else”—and cost, in my opinion, cost isn’t an issue, you know, and delay in getting them isn’t an issue. And so that’s why I think it’s been really hard with the supply chain, but I think there’s a lot of people out there, pushing it.
Alright, this shouldn’t be me talking this whole time. So Dan, what Chris said—there’s a difference of opinion, or you’re looking at that difference of opinion just a little different interpretation. What do you on the supply chain?
So, my level of frustration with all the nonsense out there has just reached fever pitch levels, and I say things that maybe go overboard a little bit. And so that’s where I’ve gotten to on supply chain, is just—alright. Yes, I agree with Chris. There is an FAQ that says “Here’s how you qualify for a supply chain.” It works in theory, and it’s just, does it work in reality, with all the nonsense that I’ve seen? That’s where I’m overstating my point of just, it’s all bogus because all the marketing that we see, that is you have a supply chain problem, you get ERC for all both years—without going into the nuance of what the IRS actually gave us with a rule, right?
And that’s the difficulty, and I’ve seen so much, had too many conversations, where, of course, every client has had a supply chain problem in some way, shape, or form. And so the easiest way, for anybody that’s just chasing the big fee, to go after business owners and try to get them thinking they can have this big credit, they might not be eligible for. So it’s gotten ugly out there. It’s kind of one of the biggest eyerolls of, oh yeah, supply chain, you have this needle in a haystack, perhaps, this tiny opening the IRS gave us that really wasn’t meant to apply to all of two years, and you’ve got companies trying to drive a freight truck through it. And that’s what I’ve just gotten a little overly frustrated with and just say, “Nope, doesn’t doesn’t work, you know, guilty until proven innocent. Don’t make me try to say that they’re wrong, get them to prove it to me.” Come on, you know, this is opposite of how it should be when I have these conversations.
And that’s really the frustration. I think for a lot of practitioners—it may not be this particular issue, but all these ERC problems in general, you know—we’re on the defensive, trying to explain why all of this marketing isn’t fitting a client’s situation. Instead of, you know, these companies bringing a real ERC case to the taxpayer, it’s the reverse. And so we’re stuck already too busy and trying to rework and every time they add another $26,000 free per employee, right, is another problem and another hour lost, another phone call I won’t get back. But yep, it’s something that is possible. I haven’t seen it yet.
So you guys are on the same page, for sure. It’s just, you’re more frustrated that Chris is with it, I can see that for sure. And I think I’m at your level, Dan. If I’m doing a live presentation, I don’t even want to talk ERC anymore when I’m there educating them on it. I’m starting to enjoy talking about the Inflation Reduction Act and the Investment Tax Credits and this, but inevitably the ERC comes up and inevitably the question comes up with the supply chain, and I immediately go “NO.” So I probably got that frustration level too.
But of the thousands we’ve done, we’ve done one, so you can. And Chris has done two or three. So you can. Nick, I didn’t want to leave you out—do you have any supply chain comments, you want to add to that?
I mean, it is the most common, one of the most common scenarios people come in, clients who are trying to paint their argument to us. We just tell them like, “The supply chain issue that was going on worldwide is not what is targeted for ERC. Unfortunately, like most manufacturers, a lot of them weren’t deemed essential. They weren’t close.” So the argument falls flat unless, again, it was a very, very niche offering. And most of the time you wouldn’t be able to qualify on that—they qualify some other way. So it’s like, why even go down that route for the most part? That’s just what we see.
Yeah, and to expand on this a little bit. And you guys can jump in on this. But Dan had sent me a link to something that a CPA firm put out there on the ERC and supply chain issues, and it started off great. It explained how IRS FAQs (worked), it explained the credit, and explained—in fact, I wrote it down here, I put the name of the supplier and the location and the specific orders that were imposed on them, the duration of supply chain problems, and I mean, it looked really good. And then, and I want your guys’ opinion, and Dan, I think I know yours already.
But then they went on to say, “Okay, well, here’s all the supply. Here’s all the mandates that were in foreign countries that affected us.” Maybe I’ve misinterpreted the government mandate, but in my mind that’s, that’s why—there haven’t really been any federal—but state, local, city… I don’t think a mandate in Finland is going to affect me for the credit. Am I looking at this wrong? Or do you guys have information on that I don’t know?
No, I agree. Foreign orders—I don’t get that argument at all. It really came out of left field and after the article started out, you know, great.
Oh you saw this too?
Yeah, I saw this. And I don’t understand it. Sometimes either the argument’s about the ports—some are in the U.S.. And foreign, you know, government orders, I just, I don’t understand the foreign government orders at all. And the port argument to me is just so nonspecific. And then you apply the test to it, and you’re like, “I’m not sure how the port argument holds up.” You know, on its face, you think, “Oh, well, yeah, the ports were totally hosed. You know, nothing was going in or out.” But then you go back and you look at, you know, the FAQ and how you’re supposed to apply it. I don’t see how the port argument holds up, either.
So if that’s the crux of your supply chain argument, it’s like, you know, orders in China or India, or Europe, or a port argument, either in the U.S., or a foreign port. I mean, that seems pretty weak to me.
Yeah I mean, we’ve established how I feel about supply chain arguments, you know. They’re all bogus, but—okay, okay, maybe not all—but mostly bogus. And then you’re gonna stack this foreign order and a port thing on top of it? It’s like a perfect trifecta of weak arguments. And oh, boy, it’s a struggle. I mean, the ports in Los Angeles always seem to come up because it created such news of the backlog, but there was never actual government shutdown to the port. It’s the labor shortage and people getting sick, and stay-at-home orders, and the supply of everything expanding and just the volume. So there’s all these issues and delays, but the port itself wasn’t even shut down. Is that even a supplier? So much frustration there.
On the foreign order question—it is not the way that notice is written. It says federal, state and local. The argument is that the local government is this government in China, right, so that local encompasses a foreign government? I’ve heard that from a practitioner at some point. I think that’s where that argument comes from. But a little interesting approach, needless to say, that’s not how the IRS views this. You know, that is what they say in their notice.
The hardest part about this and a lot of these positions is that they’re not presented in such a way to say, “If you are willing to take this position and go challenge the IRS in court, perhaps here’s something that you could be interested in doing,” right? because that’s what it is, you know? We know this is not the IRS position. And so if it was examined and this portion reviewed, that’s where it will have to go. You have to argue it out in tax court and see if you get the court to agree with you. And I think a lot of business owners that might be looking at a weak position, or a position, maybe we’d call it, “not generally accepted amongst most practitioners,” they’re not hearing that, right? This is presented as 100% audit defense—you don’t have to worry about it—zero risk, right?
I’ve had most people telling me, “Well, I don’t have to worry about anything, because I’ll get covered.” And I say, “Well, go look at that agreement again, because I think they’d only cover their fees. If anyone’s going to cover their fees and pay back the credit and interest and penalties on your behalf, sure, go ahead and sign up. But also, good luck finding that company still around in three to five years.”
But yeah, zero risk just really gets me with some of these out here and how it’s presented. It’s not at all a “Yes, you can go ahead and see if you can get a court to agree with you.” It’s presented as fact. And that’s hard, to be going down those roads, let alone stack up three of those things together—supply chain, port, and a foreign order. Yeah, I was the furthest I’d seen something go, for sure.
Yeah. Well, it was crazy. I read it again today—well, skimmed it today—because it’s funny, I heard the same argument by the same firm—and I didn’t say names, so no big deal. On a webinar, last week or two weeks ago, it was a recorded webinar, but it was out recently—they had done it on the Inflation Reduction Act. And then they added this on the end, and my jaw just dropped. I’m like, what, what are you saying? No.
Alright. Nick, I’m gonna get to you in a second on another question. But let me expand on what Dan said there. I have got, we’ve got and then we may have said this before, when the recording started. We have a year and a half still before 2020 leaves us, we have two and a half years before ‘21 leaves us. There’s lots of time. If you’re going to be on that, you know, well gray area in my opinion—you’re probably past the gray area on a lot of these… Wait. There’s no rush. People are being told “This money is going away, it’s going to expire, you gotta do it now.” It doesn’t. Wait. Let’s see if these court cases are out there. Let’s see if some guidance comes out that is going to change someone’s opinion. But on some of these that is not—especially supply chain, especially the ports like Chris said, for all that, just wait, be patient, see what happens.
I had one, and again, there’s me talking too much because we got four of us on here, we’re already a half hour in. But this is such an interesting topic. And by the way, I’ll ask you guys your horror stories then too in a minute. But there was one—I had a client, we support CPA firms, so they bring clients to us. We had a CPA call me and say, “Hey, I got this client, they’re being offered four and a half”—not being offered—“they’ve been told there’s four and a half million dollars of credit.” I honestly don’t remember the industry right now, but I think it was like a civil engineering firm, or, you know, it was no revenue drop, it was government orders, but they were qualifying for six quarters, four and a half million dollars. I got on the call with them, very sophisticated taxpayer. They knew, in fact, the CPA told me that they were probably more educated on PPP quicker than anybody else they knew, even other CPAs they knew. So a very sophisticated taxpayer.
We got on a call, I explained my opinion—you don’t qualify. They’re saying, “We do, I see why you’re saying we don’t. I’m just gonna take the four and a half million dollars, I’m gonna go put it in the bank and let it sit there for three years, and we’ll see what happens.” And how can that not be tempting? I mean, honestly, that’s four and a half million dollars. How is that not tempting? Nick, I’m gonna come back to you. We’ll just continue with this a second. That’s even not even really a horror story. I mean, you guys probably have horror stories. Let’s start with Chris, who wants to go first, Chris or Dan?
Sure, I will—I’ll give it a run. I mean, I’ve seen sort of each side of the horror story. So you know, I work with a salon. They end up going with one of these weird ERC credit companies. And, you know, the salon obviously qualifies—obviously. They have significant capacity restrictions for a long period of time, they’re in a very blue state, it seems pretty clear. And somehow, the credit company ends up coming back with a credit of like, a hundred grand. And I’m like, “That doesn’t seem right.” And so we do it, and they end up getting significantly more, like a million bucks, because they’ve got a lot of employees, a bunch of locations. And I’m just baffled at how this, you know, credit company missed what seems so obvious to me—I mean, even qualified and gross receipts for like a good portion of the time period, which they missed. And they only claim like this little part where they’re totally closed.
And on the other extreme, you’ve got, you know, a restaurant, which again, like, they obviously qualify, they’re in a blue state, pretty clear restrictions for maybe 14 months, and one of these credit companies swoops in, applies the OSHA argument to the whole, you know, six quarters, and qualifies them basically in all of second quarter and third quarter 2021, based on just bogus, this OSHA argument. And I’m looking there like, “These people actually qualified for ERC, you didn’t need the bogus argument, to get the last, you know, four months or whatever—they legitimately qualified, and then you apply this blanket, BS argument.” And we saw their, you know, final report, if you want to call it that, and it doesn’t even mention the word like restaurant or brewery, I forget which one it was, it was like, it’s just a copy paste of like three pages of OSHA stuff, and then they just claim it the entire time, with no reference to the local orders, or whatever.
And so you get both ways where, you know, they’ve claimed too little because they have no idea how to even figure out ERC, or they’ve claimed way too much, based on just a bogus argument that they are flat out applying to every business that walks through their door. So yeah, I mean, I’m definitely not loving the tax credit shops. And I think to Dan’s earlier point, the clients don’t understand that either they totally biffed it and they missed the credit, or they’re taking a wildly aggressive position and they just have no idea that that’s what they’re doing.
It’s one thing if the client understands, “Hey, you know, I feel like this really impacted me, I want to be more aggressive rather than less.” But the credit companies never present it that way. It’s just a slam dunk, “You qualify. You know, zero risk audit protection, you know, all the rest.”
This reminds me of the housing crash, you know, where everybody was, you know, investing in housing, everyone’s getting free mortgages, everybody was selling mortgages. It’s the same thing now—it’s everybody’s selling ERC. You know, my, you know, a dentist is probably going to sell me an ERC the next time I go in or something like that, which is what’s happening. Nick, I’m gonna go back to you because we skipped you last time. So have any horror stories you run into?
Oh, yeah. So we had a CPA actually came to us, because, you know, similarly, you’re talking about Chris. Their client went and took an ERC credit with one of the shops and came to us like, “Hey, I really want to have Tri-Merit, like, take another look at this. Make sure you guys call up the manufacturer.” Right? They’re essential, didn’t have a drop, remained open—they qualified for nothing.
Not a single quarter. And so we have to kind of tell them that like, “Hey, you know, yeah, you don’t qualify for any of this.” And you look at the contract they signed into, and the company who’s filing it was saying something, essentially, they signed off having the checks sent to that company, who would then take their portion out, and I’m like, “First off, they can’t do that. That’s not even”—so now the CPA is talking about the client, they’re trying to figure out how to unwind this in and unfile for the credit, before it gets processed, right?
So it’s like, how do you do that? Like, well, I’m sure if you file something that tells the IRS you owe them money, they’re gonna process that before the one that’s saying they owe you money—probably just how it’s gonna happen. But so they were working to kind of unwind that. But it was like $1.1 million of credits claimed, no qualification whatsoever.
So didn’t you say that the provider said “You have to set up a new bank account with us on the account” or something like that?
We’ve seen some contracts like that, where they made you set up something specific to be able to share with them. We’ve seen some crazy, crazy stuff out there. These people are gonna obviously try to get their money and kind of like Dan said, are they going to be around in a few years to be able to go after?
No. They won’t.
They’re gonna take their money and run.
Yeah, they’re gonna be in some foreign country somewhere with no extradition.
Yeah, that is the craziest one I’ve seen for obviously, the bad side of things. So that’s the one that this CPA was kind of horrified when he found out that, which we don’t even know if it’s properly filed, because supposedly that company was gonna be filing on their behalf, but they had not signed a POA. I’m like, “I don’t know how they can legally do that for you even, so.”
What happened with it? The CPA said he’s gonna work to unwind it, but those are the horror stories. Talk with your clients. You never know what they’re taking.
Yeah. Alright, Dan, not to skip you. I’m sure you got a few.
I mean, you kicked off here with how do you not go after it? If you can just stick the money in the bank and wait and see what happens?
I mean, it’s a real thing. You know, business owners, I think everything’s a little blurry after all this “PPP is free money,” and this feels like more funding, there’s other things—people just thinking about things differently, and aren’t maybe getting all the information at these decision points, either. But there are, as you know, it’s not just the course, pay it back, right? It’s paying it back. You know, can you afford to pay it back at 130, 150% anytime in the next five years? Is that the kind of business decision you want to make now?
You know, so I try to put in real terms, because there is interest and penalties, you are out the fee from a company you probably may or may not be able to collect it back from if they actually perform on their audit defense guarantee in three to five—or who knows how long this goes. There’s a lot of concerns there.
And then, for a larger company sitting on a claim that big Randy, I gotta imagine they got a financial statement, right? And that’s where this gets really ugly, where I’m talking to other professionals that are having these ugly situations with their clients who’ve gone and done these things, and now they’re looking at it from a financial statement, a GAAP perspective after the fact that they have to make a determination, more likely than not, is this going to be sustained on audit, And do we have to book a liability on a GAAP financial? Do we have to disclose this is a non compliant position? The AICPA has put out a guide to how you have to handle this from a reporting perspective, and that’s going to sit there on financial statements for years to come if that is the case.
We’ve had one in the last 30 days, a prospective client, and it’s in a very blue collar, not shut down industry, claimed all of both years, millions of dollars. And it’s just about everything you can think of that’s a problem. There was an S election at the beginning of ‘22. So all the stuff wasn’t looked back into 2020 and 2021, and that would be C Corp tax. They got very much an issue with their audited financial statement for whatever firm they end up going with, that’s gonna have to deal with a massive receivable book and disclosing this stuff.
So just to say that I can stick the money in a bank account and wait and see what happens, play the audit lottery. I mean, it’s tax fraud already.
Because you know you don’t qualify, and you’ve taken it, right? I don’t mess around. I say it like this on that one. But then I also warn people—there’s other issues. If you go down the road, and this is something that’s gonna have to stick in your financials to get any decent accountant to give you a financial on this. It’s going to be an issue that comes up, it’s going to be material, and you’re going to try to turn around and sell the business or do anything else with it down the road. I mean, this is a black eye to get your GAAP reporting right. So there’s other issues beyond that. I mean, if the interest and penalties conversation doesn’t get them alone, there’s plenty else to be concerned about beyond that
But there’s still going to be plenty of people rolling the dice. You’re not wrong there, Randy. It’s hard when people are just seeing the dollar signs. And that’s why that’s why these are so successful. That’s why we see so many of them. They can charge big fees, pop up and do well, and it sounds pretty believable. There’s always enough truth in everything that’s thrown out there that an the average business owner won’t know the difference. And we’re awash with all of this government, PPP funds, and the rest that we’re still sorting through. So it feels like it makes sense. So it’s tough.
It’s really tough. And that was the issue that client had, or that CPA had when they had that call was they were doing audited financial statements—”What am I supposed to do?” I go, “That’s not my expertise. So sorry. I can just tell you it’s not a real credit. That’s what I can tell you.”
We’re already 45 minutes in—what do you guys want to do? Do you want to go down another path, or you want to each do a quick wrap up on, “Hey, here’s your advice,” or, I mean, because there’s so much I want to talk about yet, but I don’t know if we can go another hour and a half!
Well, we talked about OSHA, we talked about supply chain.
I mean, there’s the whole like being able to work remote comparatively, right, and where do you draw that line?
Is that written in the FAQ that way?
Yeah. There’s like, it asks four questions about portability of work.
With, a qualifying shutdown and to be able to operate in a comparable manner, remotely, and where does that stop? And there’s some line on the guidance—it says something along the lines of, essentially, “If you weren’t working remote before, you get a small time period to develop your policies.”
To ramp up.
I’m like, “That’s so vague. What does that mean? You need to qualify yourself for one week, two weeks, can you just negligently never develop policies and continue to qualify? Like, how does that”—obviously you can’t, I’m playing devil’s advocate here. But you know, have you guys taken anything with that? Like, has anyone tried to make that argument, that, hey, we didn’t have remote before?
That’s something I brought up to clients mostly to try to talk them down off the ledge, of, “Yeah, you were able to get to this and you were able to do remote work and everyone’s affected, right? That’s the problem, is we’ve all felt the effects of COVID in one way, shape, or form. We’ve all had supply chain problems. Do we fit the parameters of this program and the guidance, actually?”
So I walk them through that. “Alright, well, how long did it take you to get the computers out, to get IT set up, and to get it in place? Okay, if you’re going to have this, are you really going to claim this credit for the one payroll run that fell within that two week timeframe that you were still ramping up? And most of them, you know, they couldn’t operate for a couple of days, right? It wasn’t a massive length of time over over a month, right? That’s typically the story.
So they begin to see once I walk them through like that kind of the guidance there around a “short transition period,” I think they might have termed it in the guidance, that just just how restrictive it is. Gotta be less than 5% of everything I’ve seen. It’s pretty rare.
Alright, I’ll probably ask you all to do a quick wrap up, you know, of where we are, what we’ve seen and what we need to do.
Well, if we’re gonna have something out for an update here on ERC, we have to mention, the IRS finally said something here. I don’t think we actually ended up saying that—we’re just so used to it at this point, it feels like old news, but the IRS did come out and say “Beware of these third parties promoting these claims, these improper claims. If it’s too good to be true, it probably is,” right? Have a little common sense. And it’s amazing how some of these come and wrap around. It feels like we’re missing the common sense of “Yes, you were you were open. You were up. You had no impact. And yet, I’m still getting this phone call from you, client? That you think somehow you get $26,000 per employee because the radio ads said so.”
So I’m thankful. It took a while, it took a lot of arm wringing, and I know the AICPA was lobbying real hard to the IRS to do more, and get ahead of this. So they finally put out that warning, which did spin off a lot of other press. So this is finally getting some more attention that it deserves. There was a Wall Street Journal article, just looking at and talking about, just this in general, and the IRS highlighted information referrals for professionals to make if they do run into some bad actors, because the IRS is looking at these—they have their audit teams, they have IRS-CI, that those investigations are going on.
So I gotta mention that, gotta throw it out there, that was at least a positive development, just because it felt like I had just stopped talking on one side, and then a poor business owner saying, “Well, I have another person telling me over here that I qualified, they’re experts. And they say they have CPAs and attorneys, and you know, who do I believe?” And I’m a little bit beside myself, I felt like, early on at times, because, “Okay, I gotta give them resources on what’s actually going on, no one’s talking about this.”
So finally, a lot of people are talking about this, the IRS is talking about it, and maybe I’ll throw it over to Chris. I got to do a little input to this “Fact or Fiction” resource the AICPA put out, and that was great. Chris, I know, was was instrumental in getting that out too, and getting good content. So they’ve been trying and now recently more vocally tried to push out with that resource, and as well as your podcast with the AICPA as well, Chris. So thank you for doing that. It’s been good to have others, others out there and some good print resources to put in front of clients.
Yeah, I do think the IRS is coming around on this. It’s been slow. I was at the National Tax conference a couple of weeks ago. The IRS was there. It’s a big topic, not just getting the stuff processed, but acknowledging the bad actors. And they’ve made it very clear this is what they’re coming after. You know, they’ve said in these IDRs, and when they get to these audits, they’re going to be asking, like, “How did you find out about ERC? Who did the calculations for you?” They’re definitely targeting these shops, to figure out who was doing the calculations, because you can’t always tell by looking at the 941-X. You know, oftentimes, that’s us, or, you know, that’s the CPA who’s signing the 941-X because, you know, the ERC shop won’t do it, which is always a giant red flag to me. If they’re not willing to sign the 941-X, I’m not so sure why you’d hire him to do your study.
But I do think IRS is getting there. We heard quite a bit about it just a couple of weeks ago that the enforcement wheel is coming. They made their announcement, and they know that the bad actors are prevalent, and they’re coming. I don’t know how long it’s gonna take for them to really get there in force—it might take a while, because they, you know, move at the speed of the IRS. But there is an acting commissioner just appointed, and they actually just nominated for the new commissioner. I don’t know how long that confirmation process will be, but I do think there’s maybe a little bit of a holding pattern until that new commissioner gets in place. The acting commissioner, just sort of, you know, keeps the boat afloat. And the new commissioner will be interesting to see, I haven’t heard from him yet, but it’ll be interesting to see if he continues with the ERC as a priority. I would expect that he will, but you know, you never know until you see if he gets confirmed and then see what his priorities are going to be.
I mean, I think it’s one of the biggest no brainers in the world to put all your resources at auditing these, because it is so easy to figure out who did it right, and who did it wrong. So I would think—I would think—but I guess we’ll have to wait and see, that they will put a lot of resources into this. Nick, any final thoughts on you?
No, I mean, just following up on that point. Like, us being in this every day and seeing some of the numbers some of these shops are posting on their webpage, just you know, for how many credits they’ve claimed—it’s got to be, I mean, how many billions well, well above ten billion. Maybe approaching a hundred billion of fraudulent claims? I don’t know. There’s a lot out there.
Well, I thought I heard numbers bigger than that in the past. Dan, didn’t you tell me a number that you heard once they were estimating there?
Well, there was a report that came out about claims that were flagged as suspicious or something like that. And it was in the trillions.
That’s what I thought.
And that that was an odd, you know, there may have been, you know, just I think there may be a line there between just completely fabricated forms people are trying to file versus, you know, a normal business that might just be working with someone a little not to the level. I didn’t really understand that number, I haven’t talked to anyone yet that really had a better take on that. I think that’s a little crazy when you think about the scope of the PPP program, to say that there’s trillions of ERC fraud, there’s something I didn’t quite add up there for me.
No, I couldn’t wrap my mind around that number. I’m like, “Wait, is that even the real number? Is that something where I have no idea? That made no sense. But I thought that was the number we had heard.
Alright, any final final thoughts, anybody in the all three can jump in one final, final time, if there’s anything else, otherwise, I’m wrapping up.
No, I’ll just say when you’re talking with your clients, you know, when they’re talking to providers, if they’re telling you you qualify on partial shutdown, and they can’t give you an executive order number or some state order number, or link it back to something like that, and they’re trying to say, general things such as supply chain or just general arguments—again, if you can’t relate to a specific mandate at the state level or federal level, it’s a red flag. It’s time to disengage.
Big red flag. And one thing I want to point out is, Dan, you put together a resource on aggressive practices with the ERC, that you put together a two page document on that. And where’s that available if people wanted to go look at it?
Sure. I just had that linked on my Twitter profile there. And that was really just trying to show, you know, I’d just heard from too many people saying, “I’m hearing from all these shops, and I’m not hearing what you’re saying. I’m not hearing that there’s all this nonsense going on, I’m just hearing about all the opportunities.” So I just started putting that together to find those people that were saying some things about the program and trying to put good firms, good voices out in one place, so I could just put something in front of clients, so that they know this isn’t just me talking about things, this isn’t just my idea, this is something throughout the profession we’re having issues with.
But early on, I felt like it was really just people like us, it was those of us in our respective places that knew what was going on, and the larger profession really wasn’t aware business owners certainly weren’t aware. So now, and that’s, that’s still out there, you can still find that on my Twitter page @DanChodan.
But honestly, now we’ve gotten a lot more. There’s been good press, this AICPA resource, the IRS warning, and now even, it’s made to this way to the Wall Street Journal. And so I know there’s just going to be more press. You know, there’s lawsuits out there that have happened, there’ll be more to come, of just businesses that are finding themselves in a tough situation, especially as the audits really start rolling, and also now as audit firms, CPA audits have to go on with these financial statements, and suddenly cash is showing up that they didn’t realize—it’s material or there’s receivable books. “Okay, we weren’t expecting that,” and it’s hard conversations have to happen. There’ll be more lawsuits.
So yeah, the resources are still out there. But hopefully, it’s become more mainstream now that we can get it in front of clients, and they can understand it a little better.
And don’t just see dollar signs, but see some of that risk as well.
Alright. Well, I appreciate you all being part of this today. Before we wrap up, why don’t you—start with you, Chris—just give us, if anybody wants to reach out to you or getting more information from you, what’s a good place to look at finding that?
Yeah, you can find me on Twitter @RavenousTiger. That’s me. And, you know, my advice is just to be careful out there. And to Randy’s point, this is open for another 18 months on the 2020 year, so before your client goes and does something they might regret, just try and get in there and stop them, and have that conversation—because you do have time. So you got plenty of time to get this sorted out. Don’t let people rush into something they’re gonna regret.
Good call. Nick, good ways to get a hold of you? And then any final thoughts there too.
Yeah, I mean, I’m not really active on Twitter! You can always go on our website, find me, send me an email—www.tri-merit.com. Always happy to have a conversation with this, give a second opinion, you know. We have no issues getting on the phone, talking with anyone. But yeah, that’s the biggest thing I can say is get a second opinion. If you’re not sure, if it seems too good to be true, it probably is. So try to get to someone else and see what they’re able to tell you.
You search Trout CPA, you’ll find me there and on Twitter, @DanChodan. And my final thought would just be, let’s get this band back together in five or ten years and see what the tax court case looks like. Do any of these issues end up squeaking either the other ways, or what else happened? It’ll be fascinating to sit back and look at this, and just see. I know those in the IRS I’ve talked to expect to be very busy with this for a very long time, and so it’ll be interesting to look back with the benefit of time and see how it all plays out.
Oh yeah, we’re definitely going to have an ERC reunion and then Dan, you and Nick, you’ve been to the bar in Chicago, and then Chris, we’re going to have to get you to the bar, we’ll all meet at the bar in Chicago and we’ll have a few drinks and and talk ERC war stories.
But to your point, Dan, I was already thinking we’re going to do this again next year. The four of us are gonna get back on, we’re gonna see what the updates are. We’re gonna see if things have calmed down, we’re gonna see if people are getting, seeing the audits, how the audits are happening, and what if AICPA keeps pushing, if IRS keeps listening, or starts listening—I guess keeps listening at this point—hopefully, we’re going to see things settle down. Because we’re all, all four of us are still going to be doing this for a while. And rather than fight bad claims, we’d rather help people that actually deserved and earned—earned, is that the right word? I guess. Earned this credit by meeting one of the two real requirements.
So thanks, everybody. This was a great panel today. I really appreciate them all being here. I really appreciate you all listening. As always, if you like the show, please give us a five star rating. And if you ever want to reach out to me, well, you’ll see that in the show notes. Thanks, everybody.
About the Guest
Randy’s guests for this special ERC Roundup episode were:
- Nick Pantaleo, Controller and CPA at Tri-Merit and Partner-to-Be as of 2023.
- Dan Chodan, Tax Partner at Trout CPA in Lancaster, Pennsylvania.
- Chris Wittich, Partner at Boyum Barenscheer in Minneapolis.
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.