IRS Office of Professional Responsibility Provides Guidance on ERC Claims
In response to requests from tax practitioners, the IRS Office of Professional Responsibility (OPR) recently issued guidance on practitioners’ professional responsibility obligations in connection with clients’ Employee Retention Credit (ERC) claims, including prior federal tax returns claiming the ERC that the practitioners did not themselves prepare.
Enacted in 2020 as part of the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), the ERC is a refundable tax credit for 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 Dec. 31, 2021.
In a recently published bulletin, the OPR said that to fulfill their professional obligations to clients and 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). The OPR administers and enforces Circular 230, which has several provisions that are implicated when dealing with a client who has claimed or is seeking to claim an ERC.
The bulletin stated that when entering into an engagement with a client who has claimed the ERC, wants to claim it, or asks about the possibility, a practitioner needs to have or gain an in-depth knowledge of the credit. 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.
If a practitioner has reason to believe a client’s excessive ERC claim is owing to the client’s 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, advise the client of the overstated claim and any additional tax and penalties that could apply and, if requested, 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.
The guidance also notes that if a practitioner cannot reasonably conclude the client is or was eligible to claim the ERC, they should not prepare an original or amended return that claims or perpetuates a potentially improper credit. Additionally, if a practitioner learns a current client did not comply with the ERC requirements in a prior tax 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.