Employee Retention Credit Update: What Recipients of the Credit Need to Know as the IRS Begins its Audits


Among the last of the Covid-era stimulus programs to still accept new applications, the Employee Retention Credit, or ERC, is now also the focus of heightened scrutiny by the IRS, which has begun auditing recipients of the tax credit. Although the specter of a looming audit has rattled recipients of the ERC, many of their concerns can be assuaged by a pre-audit analysis to confirm and support recipients’ eligibility and good faith application for the credit.

By way of background, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act on March 27, 2020. As part of that legislation, the Government instituted the ERC, a refundable tax credit against certain employment taxes. The ERC allows eligible employers immediate access to the credit by reducing employment tax deposits, or, in some cases, obtaining an advance payment from the IRS for the credit.

Congress' enactment of the Taxpayer Certainty and Disaster Tax Relief Act of 2020 as part of the Consolidated Appropriations Act (“CAA”) on December 27, 2020 made several notable changes to the ERC program. Importantly, eligible employers can now claim a credit of up to $7,000 per quarter on the qualified wages paid to employees if the employers either (a) experienced at least a 20% decline in gross revenue as compared to the same quarter in 2019, or (b) suffered a total or partial suspension in 2021 due to governmental order(s) imposing COVID based limitations on commerce. (September 2021 is the final month of eligibility for the ERC.)

The program did not initially attract the same attention as some of its COVID-era counterparts such as the Paycheck Protection Program (PPP) and COVID-19 Economic Injury Disaster Loans (EIDL), perhaps because it was implemented as a tax credit, and not a loan. Also, unlike other covid-era stimulus programs, there is no set deadline by which to file an amended tax return (by filing an amended Form 941) to obtain ERC credits retroactively (i.e., by the IRS’ issuance of a check in the credit amount). A third key difference between the ERC and other stimulus payments is that there is no requirement to utilize ERC funds in any specific way.

Despite not garnering the same attention as its loan-based counterparts, specialized practitioners have scrutinized the ERC and its eligibility requirements when advising clients claiming the credit. Two eligibility requirements, in particular, have been the focus of attorneys and accountants since the ERC was passed by Congress in March 2020. The first concerns the aggregation rules that a company must comply with to not exceed the ERC’s full-time-employee threshold (the “FTE” threshold was 100 in 2020 and 500 in 2021). Of note: the rules applicable to quantifying the FTE count are similar, but not identical, to the aggregation rules in force for PPP loan eligibility.

The second practical focus when advising clients on ERC eligibility has been its “partial suspension” criterion. This requirement appears more open to interpretation that the numerical calculation needed for FTE counts, and has therefore been the subject of debate and varying interpretations. Simply put, the legislation and subsequent guidance promulgated by the IRS have permitted companies to claim ERC eligibility if more-than-a-nominal component of their business suffered at least a partial suspension of business activities due to COVID-related government mandates.

Though IRS guidance has been very helpful to companies and their advisors in determining whether they met the partial suspension test, and thus are eligible for the ERC, every business’s experience during the pandemic was unique, so no bright-line test has emerged to determine whether a partial suspension occurred. That makes it imperative for companies with questions regarding eligibility to consult with lawyers and accountants who have analyzed both the statute and related guidance before applying for the credit, or when preparing in advance for the possibility of a governmental audit.

Notably, with its passage of the American Rescue Plan of 2021, Congress extended the time by which the IRS could audit ERC claims from three years to five. Unsurprisingly, despite the elongated time the IRS has been granted to perform audits of ERC claims, such audits have already begun. While those audits are still in their infancy, both ZEK and Fasten Halberstam have reviewed and analyzed Information Document Requests issued by the IRS to various ERC recipients. It appears that the primary focus of the IRS in this initial stage is to examine companies that potentially ran afoul of aggregation limits by utilizing any number of improper methods, including assignment of shares of the applicant entity to ensure its qualification.

Though perhaps secondary to the aggregation issue, the IRS also appears interested in understanding the underlying government mandates relied upon by companies that predicated their eligibility on a partial suspension.

For most companies that claimed the credit, whether their credit has already been received or is still pending payment, a potential IRS audit should not be cause for alarm. However, for many companies, particularly those that engaged in complex aggregation and/or partial suspension analysis, now is the time to ensure all underlying facts and analysis supporting their applications for the ERC are in order to create an audit-ready file.

Robert Guttmann advises numerous healthcare operators, including of Skilled Nursing Facilities, in devising practical and cost-effective strategies to implement their goals whether in litigation, government relations or compliance-based issues. He has also advised clients on compliance issues arising from the Cares Act including eligibility for the Employee Retention Credit. For questions regarding this article, please contact Rob at

Attorney Robert Guttmann