Professional Responsibility and the Employee Retention Credit — Office of Professional Responsibility, Internal Revenue Service (March 7, 2023)

Summary

IRS Office of Professional Responsibility bulletin of 03/07/2023, Issue Number 2023-02, on tax practitioners’ duties under Circular 230 when clients have claimed or seek the Employee Retention Credit. It explains that the ERC is a refundable credit enacted in 2020 in the CARES Act for employers that kept paying employees during COVID-19 shutdowns or had significant declines in gross receipts, from March 13, 2020 to the end of 2021, and warns that some third-party advisers have pushed improper claims for hefty upfront or contingent fees. Practitioners must exercise due diligence under section 10.22(a), make reasonable inquiries before relying on client information, and not prepare a return claiming a credit they cannot reasonably conclude the client is eligible for. They must tell clients of past noncompliance and may point them to Form 14242 to complain about another adviser.

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Professional Responsibility and the Employee Retention Credit
Internal Revenue Service (IRS) sent this bulletin at 03/07/2023 04:16 PM EST
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 Alerts from Office of Professional Responsibility (OPR)                                                     03/07/2023


  OPR Resources                        Issue Number: 2023-02
  Circular 230 Tax Professionals

  Circular No. 230 (Rev. 6-2014)
                                       Inside This Issue
  Frequently Asked Questions
                                       Professional Responsibility and the Employee Retention
  Latest News and Guidance from        Credit
  OPR

  Disciplinary Sanctions - IRB        Since the Fall of 2022, the IRS has issued several warnings to employers to beware of
                                      third parties promoting improper Employee Retention Credit (ERC) claims. See IRS
  OPR Webinars                         IR-2023-40 (Mar. 7, 2023); IRS IR-2022-183 (Oct. 19, 2022); COVID Tax Tip 2022-170
                                      (Nov. 7, 2022). With tax filing season in full swing, tax professionals are request ng
                                      guidance to ensure they are meeting their Circular 230 professional responsibilities
                                      and the standards required to prepare and sign original tax returns, amended returns,
                                      or claims for refund relating to these credits.

                                       I. Purpose and Operation of the ERC

                                      The ERC is a refundable tax credit that Congress enacted in 2020 as part of the
                                      Coronavirus Aid, Relief, and Economic Security Ac (the CARES Act). The ERC was
                                      enacted for businesses (employers) who continued paying employees during a
                                      shutdown due to the COVID-19 pandemic or who experienced significant declines in
                                      gross receipts, from March 13, 2020, to December 31,2021. Eligible employers may
                                      claim the ERC on an original or amended employment tax return for a period within
                                      those dates.

                                      To be eligible for the ERC, employers must have:

                                           • Sustained a full or partial suspension of their business operations in
                                             compliance with orders from an appropriate governmental authority limiting
                                             commerce, travel, or group meetings due to COVID-19 during 2020 or the first
                                             three quarters of 2021,
                                           • Experienced a significant decline in gross receipts during 2020 or a decline in
                                             gross receipts during the first three quarters of 2021 because of COVID-19, or
                                           • Qualified as a recovery startup business for the third or fourth quarters of
                                             2021. (Only recovery startup businesses are eligible for the ERC in the fourth
                                             quarter of 2021.)
The amount of an employer's eligible ERC depends on several factors, including the
number of employees, the amount of the employer's payroll and gross receipts, and
whether the employer paid any sick or family leave wages. Significantly, the amount of
the ERC reduces the employer's allowable wage deduction on its income tax return. In
addition, eligible employers cannot claim the ERC for any quarter for which wages
were reported as payroll costs in obtaining Payroll Protection Plan (PPP) loan
forgiveness or were used to claim certain other tax credits.

In its news releases, the IRS warned employers that some third-party advisers were
urging employers to claim the ERC without appropriately informing them of limitations
on eligibility and the correct computation of the credit Often this advice-for which
these third-party advisers usually charge hefty upfront fees or a fee contingent on the
amount of the refund—has led some employers to claim excessive ERCs based on
improper positions. The IRS has urged affected employers to file amended returns to
correct the excessive ERC claims and minimize interest charges and possible
penalties.

In a related development, the IRS Criminal Investigation Division and the US
Department of Justice have initiated criminal investigations and in some cases
indictments against promoters (and other enablers) of excessive ERC claims.

II. Tax Professionals’ Role in ERC Compliance

The IRS's outreach efforts to employers about possible excessive ERC claims have
prompted requests from tax practitioners for the IRS-and, in particular, the Office of
Professional Responsibility (OPR)-to provide guidance on their professional
 responsibility obligations in connection with clients ERC claims, including prior federal
tax returns claiming the ERC that the practitioners did not themselves prepare.

To fulfill their professional obligations to clients and to tax administration, practitioners
-attorneys, certified public accountants, and enrolled agents-must meet the
applicable provisions in Circular 230, Regulations Governing Practice before the
Internal Revenue Service 31 CFR Subtitle A, Part 10). Circular 230 which he OPR
administers and enforces, has several provisions that are implicated when dealing
with a client who has claimed or is seeking to claim an ERC.

A. Diligence as to Accuracy

Section 10.22(a) of Circular 230 requires a practitioner to exercise due diligence in
preparing and filing tax returns or other documents on a client's behalf with the IRS
and in ensuring the correctness of the practitioner's written or oral representations to
clients and the IRS. Practitioners who prepare income, employment, and other tax
returns for clients have a duty of due diligence to inquire of their clients with sufficient
data I to ascertain the information necessary to determine clients eligibility for the ERC
and to claim the proper amount of the ERC on the clients returns.

For purposes of exercising due diligence, section 10.34(d) allows a practitioner to
gene ally rely in good faith and without verification, on information from the client.
Good-faith reliance however, contemplates that a practitioner will make reasonable
inquiries of a client to confirm eligibility for the ERC and to determine the correct
amount of the credit. A practitioner may accept the clients responses at face value if it
 is reasonable. But a practitioner may not ignore the implications of information the
practitioner knows or has received from the client, If the information from the client
appears to be incorrect, incomplete or inconsistent with other facts the practitioner
knows, the practitioner cannot simply accept the client's information but must make
further inquiries of the client to reconcile the incomplete, incorrect, or inconsistent
facts.

If the practitioner cannot reasonably conclude (consistent with the standards
discussed in this guidance) that the client is or was eligible to claim the ERC, then the
practitioner should not prepare an original or amended return that claims or
perpetuates a potentially improper credit.

Additionally if a practitioner learns that a current client did not comply with the ERC
requirements in a prior ax year, the practitioner must, under section 10.21, promptly
inform the client of the noncompliance, error, or omission and any penalty or
penalties that may apply.

B. Standards for Tax Returns and Other Documents
When a practitioner assists or advises a client in reporting income or other items on a
tax return in filing amended returns or claims for refund or with positions taken on a
return or claim for refund, the standards in section 10.34 apply to the practitioner's
activities. For example, section 10.34(b) prohibits advising a client to take a position
that lacks a reasonable basis or is an unreasonable position under section 6694(a) 2)
of the Internal Revenue Code Additionally, section 10.34(c) requires a practitioner to
advise a client of any potential penalties likely to apply to a position taken on a tax
return the practitioner prepares for the client or when the practitioner has advised the
client about the position taken. Under section 10.34(c), a practitioner must also inform
the client of any opportunity to avoid penalties through adequate disclosure by, for
example, filing Form 8275, Disclosure Statement.

In the context of an ERC a practitioner acting as a preparer or adviser to a client may
determine that he client had previously da med an excessive ERC. In addition to
meeting their obligation under section 10.21 as a best practice, he practitioner should
consider advising the client of the opiton of filing an amended return. The practitioner
 is not obligated to prepare the amended ERC claim unless asked by the client and
then only if the practitioner feels competent to do so (see section 10.35 of Circular
230).

C. Written Advice

A related provision-section 10.37(a)(3) concerning written advice provided by a
practitioner—allows the practitioner in their advice to a client to rely on the advice of
others only if the reliance is reasonable under all the facts and circumstances,
including whether the other adviser had a conflict of interest within the meaning of
section 10.29. Thus if the other adviser, who may have advised the client to claim the
ERC, has a conflict because of the amount or character of the fee the adviser charged
for the advice at the time, then the practitioner's reliance on that advice may not be
reasonable. Practitioners should note that section 10.27 separately limits the
circumstances in which an adviser, if a practitioner, may charge a contingent fee.

III. Conclusion

When a practitioner enters into an engagement with a client who has claimed the
ERC, wants to claim it or asks about the possibility, the practitioner needs to have or
gain an in-depth know edge of the credit especially its eligibility criteria. The
practitioner must also follow Circular 230's requirements of (1) due diligence in the
practitioner's advice and in preparing and filing returns including the specific
standards in section 10.34); 2) full disclosure to a client of their tax situation; and (3)
reasonable reliance on client-provided information and on any advice provided by
another tax professional.

  a practitioner has reason to believe that a client's excessive ERC claim is owing to
the clients reliance on erroneous or improper advice from another practitioner, tax
return preparer, or other third party, the practitioner should consistent with Circular
230 and the guidance above advise the client of the overstated claim and any
additional tax and penalties that could apply and, if requested, competently assist the
client in correcting or mitigating the problem. The practitioner should also consider
informing the client of the opportunity to file a complaint about the other adviser using
Form 14242, Report Suspected Abusive Tax Promotions or Preparers.




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