Dilemmas Employee Retention Credits Pose for CPAs
Many CPAs are considering (or have used) contingent fee billing arrangements to assist their clients with obtaining Employee Retention Credits (ERC). Unfortunately, many believe they’re permitted to accept contingent fees for amending their clients’ payroll tax and income tax returns. But CPAs are not permitted to charge contingent fees for amending these returns to obtain these payroll tax credits. Professional standards1 prohibit CPAs from charging contingent fees to prepare original or amended returns.2 Some CPAs erroneously believe these services fit within one of Treasury Circular 230’s or the AICPA Code of Conduct’s exceptions.
Some CPAs believe that the American Rescue Plan’s extension of the statute of limitations (from three to five years) permitting the IRS to consider employers’ ERC eligibility and the propriety of the calculated credit amounts, guarantees “substantive review” by the IRS.3 Although it provides the IRS with more time to consider the eligibility and appropriateness of the credit, the extended period for review does not guarantee the amended returns would receive substantive IRS consideration.
Some CPAs also mistakenly believe they may accept fees for referring clients to “ERC shops” (enterprises that have sprung into existence to profiteer by charging a percentage of the ERC they calculate). These shops’ business models are singularly focused on amending payroll tax returns to maximize the ERC and their fees. So, the combination of the single-service nature of their business models — and the remote possibility that ERC shops will remain in existence when the ERC market evaporates — makes it unlikely that they will be around to defend their positions (if and when the IRS gets around to considering their propriety). This possibility is even less likely with the additional two-year extended window.
Some ERC shops and entities have solicited CPAs for referrals. There are also impediments to CPAs accepting referral fees from these entities. CPAs are prohibited from accepting commissions or referral fees from clients for whom they (1) perform an audit or review of financial statements, (2) compile financial statements without indicating a lack of independence in the compilation report, or (3) examine prospective financial statements.4
Also, since most ERC referral fee arrangements are contingent upon the amount of the credit obtained, the referral fees paid to CPAs referring their clients to ERC shops would, by extension, be contingent fees. So, it would be unethical (prohibited) to receive such fees if (1) the fees are contingent upon the amount of ERC the employer is to receive, (2) the fees are contingent upon the amount of fees received by the ERC shop, or (3) the CPAs believe the fees they’re to receive from the ERC shop are from a contingent fee arrangement.
How Should CPAs Bill for ERC Assistance Services?
CPAs should adopt one of the traditional billing arrangements — either hourly rates or fixed fee arrangements.
Tax, Accounting, and Financial Statement Reporting
While many employers qualify for substantial ERCs, some have been misled into believing they’re entitled to more than they are eligible for. A big reason so many employers (your clients) have erroneously pursued credits (for which they don’t qualify) is because they have been bombarded by solicitations from ERC shops purporting to be able to obtain massive credits and refunds that they don’t qualify for. The IRS has issued alerts5 expressing concern regarding inflated credits being taken by employers misapplying the tax rules to claim inflated ERC. These employers allege that their operations were fully or partially suspended due to a (COVID-19-related) government order when they don’t meet those requirements. Unfortunately, considerable confusion remains as to what qualifies as “suspended operations due to a government order related to COVID-19” or having experienced “a significant decline in gross receipts” [the only two paths to qualify for ERC].
Despite never being engaged by their clients to calculate ERC or amend impacted payroll tax or income tax returns (which could impair their independence6), CPAs still face ERC-related accounting and financial statement reporting dilemmas. CAMICO policyholders face these dilemmas because many of their tax or financial statement clients engaged ERC shops or other professionals to assist them with obtaining ERC. In these instances, CPAs must not subordinate their judgment7 regarding their clients’ eligibility for the credit or the amount they qualify for.
Tax practitioners are prohibited from signing a return or claim for refund they know (or should know) contains a position that lacks a reasonable basis8 or advising these clients to sign such returns9. Tax practitioners must advise clients of potential penalties10 and inform them of all opportunities to avoid penalties being imposed by disclosing these positions11 using form 8275 or 8275R. IRC §6662 states that a reasonable basis is a greater than 25% possibility of success that the tax return position would be upheld or sustained if challenged.
Tax practitioners may rely on information provided to them by their clients but must make reasonable inquiries if the information appears incorrect, inconsistent, or incomplete.12 Tax practitioners cannot sign or advise a position on a return that is (1) unreasonable13, (2) a willful attempt to understate liability14 or (3) reckless or intentionally disregards rules and regulations15.
Further, when aware a client has not complied with tax laws or has made an error on a submitted tax return, tax practitioners must promptly inform their client of their noncompliance, error, or omission, and advise them of the tax consequences.16
So, tax laws prohibit practitioners from accommodating their clients’ erroneous ERC positions, but, unless authorized by their client or if there is an exception to the Confidential Client Information Rule17, CPAs cannot communicate these concerns to parties other than the client’s representatives.
If CPAs performing financial statement engagements believe ERC regulations were violated, they must consider whether there was noncompliance with laws and regulations (“NOCLAR”) and whether the financial statements are materially misstated.
NOCLAR is the subject of two AICPA Professional Ethics Division Interpretations issued in 2022, entitled Responding to Noncompliance With Laws and Regulations, effective June 30, 2023, with early implementation permitted.
One Interpretation impacts CPAs in public practice18 and the other impacts CPAs in industry19. The public practice rules have subtly different requirements for audit and review clients. The differences primarily involve presumptively mandatory requirements CPAs performing audits and reviews should perform and should seek to perform for other clients. From a risk management perspective, CAMICO recommends that policyholders – even when not required to do so – (1) embrace the presumptively mandatory should approach and (2) adopt the NOCLAR Interpretation now. These actions better position CPAs to defend arguments that they should have done more or having to argue that soon to be unethical actions were ethical.
If CPAs do not possess the requisite knowledge and experience to assess the reasonableness of their clients’ ERC, they should:
- Consult qualified tax professionals to assess whether receiving the credit is probable (the threshold defined in FASB ASC 450, Contingencies).
- Obtain written client representations acknowledging (a) their clients’ risks from applying for and receiving the credit and (b) that the CPA and CPA firm neither commented on nor provided any assurance regarding whether the client was eligible for the credit.
- If on financial statement engagements, CPAs conclude the receipt of material credits is not probable, or if received, the employer was probably not entitled to receive the credit, the CPA must take steps to appropriately modify the financial statements (disclosing which related accounting policies were adopted and contingencies regarding the credits or deductions), encourage the client to appropriately amend their payroll and income tax returns, modify their report on the financial statements, or withdraw. Possible modifications to the report are numerous and depend upon the financial statement services performed. In such situations, CAMICO recommends modifying the report and adding emphasis-of-matter paragraphs referencing disclosures specific to ERC ineligibility and contingencies.
When management has elected to omit substantially all disclosures in compiled or prepared financial statements, and ERC impact or related-contingency are material, CAMICO recommends adding disclosures deemed necessary under a heading “SUPPLEMENTAL INFORMATION – SUBSTANTIALLY ALL DISCLOSURES REQUIRED BY <FINANCIAL REPORTING FRAMEWORK> OMITTED.” Compilation reports would need to be modified to reference the select disclosure(s).
If faced with any of these ERC-related issues, policyholders can contact CAMICO’s Loss Prevention department at 1-800-652-1772 or email@example.com.
NJCPA members: CAMICO Mutual Insurance Company and Gallagher Affinity are a preferred provider carrier and agent of accountants’ malpractice insurance for NJCPA members. Learn more
1 ET 1.510.001, Contingent Fee Rule
2 ET 1.510.001, paragraph .02
3 ET 1.510.001, paragraph .03
4 ET 1.520.001, Commissions and Referral Fees Rule
4 IR-2022-183, released October 19, 2022
6 ET 1.295, Nonattest Services Interpretation
7 ET 1.100.001, Integrity and Objectivity Rule and ET 1.130.020 Subordination of Judgment, paragraph .01
8 Treasury Circular 230 §10.34(a)(1)(i)(A)
9 Treasury Circular 230 §10.34(a)(1)(i)(C)(ii)
10 Treasury Circular 230 §10.34(c)(1)
11 Treasury Circular 230 §10.34(c)(2)
12 Treasury Circular 230 §10.34(d)
16 Treasury Circular 230 §10.21
17 ET 1.700.001, Confidential Client Information Rule
Duncan B. Will
Duncan B. Will, CPA, ABV, CFF, CFE, is a loss prevention manager and accounting and auditing specialist with CAMICO. Will leverages his more than 30 years of experience in accounting, including public accounting, forensic accounting, consulting, and audit and tax compliance. He advises policyholders through the CAMICO’s Loss Prevention hotline and writes articles on a wide range of topics.