The Moral Hazard of Working with an "Employee Retention Credit Mill"

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Jul 11, 2023, 15:38 ET

FORT LAUDERDALE, Fla., July 11, 2023 /PRNewswire/ -- The increasing popularity of the Employee Retention Credit (ERC) has led to the proliferation of newly minted ERC service providers (known as "ERC mills"), the majority of which are unqualified and put clients at future risk of an audit. Recent news coverage and the IRS's warnings against engaging an "ERC mill" have left business owners skeptical of the COVID-19 stimulus program and unsure whom to retain to reliably assess their eligibility for the ERC.

EZ-ERC, a boutique tax advisory firm, previously released an article outlining the 6 major risks of working with an inexperienced ERC advisor. In their latest release, EZ-ERC's Managing Directors examine why ERC mills are incentivized to lead their clients into indefensible ERC positions.

The Dubious Ethics of ERC Mills

The term "ERC mill" refers to companies offering ERC advisory services even though they do not directly employ the requisite CPAs or attorneys to provide such services. Employing commission-hungry salespeople, these ERC mills will often charge their clients a high percentage-based fee, typically 25-30% of any ERC dollars they find for their clients. Some ERC mills even promise to assist their clients in the event of an IRS audit, despite having no experience representing clients before the IRS. Furthermore, many participants in the ERC industry suspect that these ERC mills will not be around to make good on their audit defense promise once their clients receive notices of such audit.

The resulting moral hazard related to engaging an ERC mill is that salespeople working for the ERC mills are strongly incentivized to overinflate their client's ERC claim and, in some cases, advise a client that they are eligible for the ERC even when they are objectively ineligible. Rather than representing their client's best interest, the ERC mills are incentivized to overstate ERC claims and misdiagnose a client as ERC-eligible because (i) the ERC mill gets paid directly in proportion to how many ERC dollars they find and (ii) the ERC mill may have shut its doors when their clients get hit with nasty ERC audits. As discussed at greater length in EZ-ERC's article titled "6 Major Risks of Working with an Inexperienced ERC Advisor," ERC mills can use the following tactics to overstate a business's ERC claim or misdiagnose its ERC eligibility:

Overapplication of the Partial Suspension Test: Many ERC mills overapply the Partial Suspension Test by claiming that nearly every company in the U.S. is eligible for the ERC because such companies were (i) restricted by OSHA's General Duty Clause or (ii) negatively affected by any disruption to the global supply chain. The only companies eligible under the Partial Suspension Test are those that were more than nominally restricted by a domestic COVID-19 executive order (not by an order that preceded COVID-19 or a foreign order that affected the global supply chain).
Failure to accurately apply the FTE Count Test or the Aggregation Test: Many ERC mills either purposely or unknowingly fail to disqualify their clients for the ERC for calendar years in which such client was too large to qualify for the ERC. A company may be too large to qualify for the ERC because (i) the company employed too many Full-Time Employees (FTEs) or (ii) the company must be aggregated with another company and the FTE count of the aggregated group of companies causes the aggregated group members to be too large to qualify for the ERC.
Failure to Avoid Double-Dipping ERC and PPP Wages: Many ERC mills either purposely or unknowingly fail to ensure that none of the employer's Payroll Protection Program-covered wages are used to calculate ERC-eligible wages.

The Benefit of Engaging Licensed Advisors

A qualified ERC advisory firm will have licensed CPAs and attorneys on staff whose professional ethics dictate they will (i) judiciously familiarize themselves with every law that affects a company's ERC eligibility and (ii) accurately apply each such law when determining a company's ERC eligibility, without a preconceived bias towards making a finding of ERC eligibility or over-inflating the dollar amount of an ERC claim.

An unintended benefit of this strict and judicious adherence to the ERC legislation and guidance is that this conservative approach has become a competitive advantage of ERC advisors such as EZ-ERC. Companies that want an unbiased and accurate evaluation of their ERC eligibility look to licensed professionals to determine their ERC eligibility precisely and correctly, rather than having an ERC mill tell them they are eligible for the highest ERC mathematically possible merely to drive-up the ERC mill's fee.

This competitive advantage has caused the following types of companies to seek out reputable, licensed advisors when considering the Employee Retention Credit:

Conservative companies that only want to claim the ERC if they are truly and clearly eligible for the ERC;
Non-profit organizations that have a zero-risk tolerance when it comes to tax filings;
Companies that are overseen by a conservative board of directors; and
Companies that utilize a conservative auditor that will only sign off on an ERC claim if it is objectively and clearly defensible.

When looking for an ERC advisor, an employer should be confident that the advisor's only intention is to gain a clear and accurate reading on whether the company is ERC-eligible and calculate the precise dollar amount for which the company is eligible. If an employer suspects that an ERC advisor is overstating an ERC claim or looking for ERC eligibility where none exists, they should seek advice from another ERC advisor as soon as possible—ideally, an advisor that employs CPAs and attorneys with decades of experience in their respective fields.

EZ-ERC's Expertise and Ethics

EZ-ERC is the only ERC advisory firm to have CPAs from the largest accounting firms in the world under the same roof as attorneys from the largest law firms in the world. The leadership team at EZ-ERC combines decades of first-in-class tax advisory experience, gained at highly reputable firms such as Deloitte, KPMG, RSM, and Alvarez & Marsal, with legal support from some of the largest, most sophisticated law firms in the world to deliver comprehensive and thoughtful ERC advisory services that are unparalleled in the ERC services industry. Where many ERC mills approach an engagement with a bias towards overinflating an ERC claim, EZ-ERC's goal is to conduct an accurate and unbiased ERC evaluation, and only make a finding of ERC eligibility where the law objectively and clearly supports such eligibility.

To contact us, email [email protected].

Authors:

Maxwell Burns, CPA, Managing Director at EZ-ERC

Kyle Moribato, Esq., Chief Legal Officer and Managing Director at EZ-ERC

SOURCE EZ-ERC