insight magazine

ERC: Full of Dilemmas for CPAs

Assisting clients with claiming the employee retention credit will likely pose several ethical dilemmas for accountants to consider. By Duncan B. Will, CPA, ABV, CFF, CFE | Digital Exclusive – 2023


The employee retention credit (ERC) is incredibly important to many eligible employers. The ERC is also incredibly complicated for many employers to navigate. The same can be said for CPAs. Consider these following situations.

Many CPAs are considering (or have already used) contingent fee billing arrangements to assist their clients with obtaining the ERC. While many believe they’re permitted to accept contingent fees for amending their clients’ payroll tax and income tax returns, professional standards actually prohibit CPAs from charging contingent fees for preparing original or amended returns. I have to note that some CPAs also erroneously believe these services fit within one of Treasury Circular 230’s or the AICPA Code of Conduct’s exceptions.

So, how should CPAs bill their ERC assistance services? My advice is that they adopt one of the traditional billing arrangements—either hourly rates or fixed fees.

Many “ERC shops” (enterprises that have sprung into existence to profiteer by charging a percentage of the ERC amount they calculate) have solicited CPAs for referrals. These shops’ business models are singularly focused on amending payroll tax returns to maximize the ERC and their fees. In turn, CPAs have been mistaken into believing they may accept fees for referring clients to these shops when there are actually impediments to them doing so. 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.

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 ERC amount 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.

Beyond billing and referral fees, there are other dilemmas to consider carefully. While many employers qualify for substantial ERC amounts, some have been misled into believing they’re entitled to more than they’re eligible for. A big reason so many employers have erroneously pursued credits for which they don’t qualify is because they’ve been bombarded by solicitations from ERC shops purporting to be able to obtain massive credits and refunds for them. The IRS has issued alerts expressing concern regarding employers misapplying the tax rules to claim inflated ERC amounts. These employers often allege that their operations were fully or partially suspended due to a COVID-19-related government order. 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,” which are the only two paths to qualify for the ERC.

Despite never being engaged by their clients to calculate ERC amounts or amend impacted payroll tax or income tax returns (which could impair their independence), CPAs still face ERC-related accounting and financial statement reporting dilemmas because many of their tax or financial statement clients engaged ERC shops or other professionals to assist them with obtaining the credit. In these instances, CPAs must not subordinate their judgment 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 basis or advising these clients to sign such returns. Tax practitioners must advise clients of potential penalties and inform them of all opportunities to avoid penalties being imposed by disclosing these positions using IRS Form 8275 or 8275R. Internal Revenue Code Section 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. Tax practitioners cannot sign or advise a position on a return that’s (1) unreasonable, (2) a willful attempt to understate liability, or (3) reckless or intentionally disregards rules and regulations.

Further, when aware a client hasn’t 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.

So, tax laws prohibit practitioners from accommodating their clients’ erroneous ERC positions, but, unless authorized by their client or if there’s an exception to the Confidential Client Information Rule, CPAs can’t 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 AICPA Professional Ethics Division interpretations issued in “Responding to Noncompliance With Laws and Regulations,” effective June 30, 2023, with early implementation permitted.

One interpretation impacts CPAs in public practice and the other impacts CPAs in industry. 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, it’s recommended that CPAs adopt the NOCLAR interpretations now. Doing so better positions CPAs to defend arguments that they should’ve done more or to argue that soon to be unethical actions were ethical.

As important as the ERC is to employers, it’s equally important that CPAs carefully consider all the ethical dilemmas that may arise while assisting their clients with claiming the credit.

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 CAMICO’s Loss Prevention hotline and writes articles on a wide range of topics.


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