On October 19, 2022, the Internal Revenue Service (IRS) publicly released a warning to employers “to be wary of third-parties who are advising them to claim the Employee Retention Credit (ERC) when they may not qualify” (Link).  This release is undoubtedly in response to the proliferation of what are now commonly referred to as “ERC mills” across the U.S. that are pushing highly aggressive eligibility positions and are largely staffed by non-tax or non-accounting professionals.  Sagemont Tax’s CEO Kenneth Dettman seconds this warning…

“Without a doubt, nearly every business owner or operator with an email address has received multiple emails from ERC mills dangling the prospect of a ‘little known’ payroll credit that can result in a $26,000 per employee cash credit.  With the heightened scrutiny by the IRS and AICPA, it is especially important for employers to keep their guard up and use common sense when deciding whether to pursue the ERC through a third-party provider. “

What is an “ERC Mill”?

The term “ERC mill” is now commonly used to describe the countless ERC service providers the IRS is alluding to in their recent warning.  The most common criticism of these “firms” is that they are largely comprised of non-credentialed sales and marketing professionals purporting to be “ERC experts” or “consultants” and pushing tenuous, high-risk eligibility positions, often solely reliant on CDC/OSHA guidance and/or supply chain disruptions in an effort to universally qualify all businesses for the ERC.

A few common traits typical of ERC mills are as follows:

• No CPA Ownership or Accounting Management. They are rarely founded, owned, and/or managed by tax, accounting, payroll, or legal professionals.  Rather, most of them are owned and operated by “serial entrepreneurs” with little to no experience in the specialized tax or accounting services industry.
• Outsourced Tax, Accounting & Legal Service Functions. ERC mills often have the majority of their “workforce” (most of which are independent contractors) focused on sales, marketing, and business development efforts.  While most of the larger ERC mills have hired a token CPA or lawyer in-house, most rely heavily on third-party accountants and lawyers to perform the tax, accounting, and/or legal work required in connection with the ERC.  Hence, they in effect operate as a sales and marketing organization, with all actual technical work outsourced to an unrelated and independently liable party.
• Overtly Aggressive Marketing Tactics on Eligibility. ERC Mills often perpetuate aggressive marketing campaigns through various digital channels to entice well-meaning business owners into their grip. They dangle the prospect of a $26,000 employee credit and assure a high likelihood of eligibility for all businesses. Their eligibility positions are often based on obscure supply chain disruptions and/or rely on non-qualifying or outdated Federal guidance issued by the CDC and OSHA. These are considered weak positions in the industry and have a lower likelihood of withstanding IRS scrutiny.
• Significant Contract Disclaimers to Shift Liability. Well aware of the fact that they lack sufficient credentials and experience to provide bona fide tax advice, most ERC mills include significant disclaimers and waivers of liability within their service agreements.  These disclaimers often indicate that the “services provided” are not tax, accounting, or legal advice.

Sagemont Tax’s Take

Sagemont Tax’s executive leadership team is comprised of multiple CPAs and/or attorneys with big firm experience (Big Four, Big Law, and Top 25 global consulting firms), and maintains that ERC services should indisputably be provided by a firm comprised of experienced tax, accounting, and legal professionals that are supported by a sales and function marketing, not a firm of sales and marketing professionals that are supported (usually externally) by tax and accounting professionals.

“Tax” – The ERC is a Federal payroll tax credit governed by the Internal Revenue Code (IRC) Section 3134 and the regulations thereunder.  It is further supplemented by IRS Notices 2021-20, 2021-23, and 2021-49. The most complex ERC fact patterns involving aggregation, full-time employee count, and related party issues, are all governed by pre-existing IRC, tax regulations, and case law (which are incorporated by reference in the above-mentioned Notices).  Hence, the starting point for the ERC should always be based on relevant technical tax code and guidance that is unequivocally most suitable to be analyzed by experienced tax professionals.

“Law” – The concept of a “full or partial suspension”, as defined in Notice 2021-20, is explicitly a facts and circumstances-based test.  It is therefore essential that the test is evaluated by professionals that are experienced with other IRS facts and circumstances tests and, in many cases, merits a bona fide legal analysis conducted by a licensed attorney.

“Accounting” – The calculation of the credit, analysis regarding the interaction between the ERC and the Paycheck Protection Program (PPP), and interpretation of the disqualified related party rules are inherently exercises in accounting.

“IRS Audits” – Finally, the possible “defense” of an ERC audit would typically need to be conducted by a CPA, Enrolled Agent (EA), or licensed attorney.  It therefore goes without saying that experience in prior IRS audit defense is essential for a service provider that agrees to assist in ERC audit defense.

Sagemont Tax encourages all business owners and operators to use common sense principles in both selecting an ERC service provider and ultimately deciding to pursue the ERC.  If, during the sales and execution process, there is no interaction with a tax or legal professional, but rather a self-proclaimed “ERC expert” is explaining to you why you (along with virtually every other business) are undeniably eligible for the credit, it’s worth taking a step back and reevaluating potential quality or integrity issues of the firm you are working with. This is particularly true if you’ve agreed to pay upfront or contingency-based fees pursuant to a contract that stipulates that the services you are receiving are anything but tax, accounting, or legal services.

In the words of Carl Sagan, “extraordinary claims require extraordinary evidence.”  While there remain extraordinary ERC opportunities out there for many business owners, be sure to demand an extraordinary service team that provides an exceptionally detailed and substantiated work product.

To learn more about Sagemont Tax’s management team, please feel free to view their bios HERE:

• Kenneth Dettman, Managing Director (Chief Executive Officer)
• Maxwell Burns, Managing Director (Head of Tax and Accounting Services)
• Kyle Morabito, Managing Director (Chief Legal Officer)
• JJ Budzik, JD, Managing Director (Technical Services Leader)
• Adam Fischer, General Counsel
• Victoria Beck, Compliance Counsel

For a summary of “Who and Where are We?”, click HERE.

Sagemont Tax is not law firm and does not provide legal advice. To the extent it is determined that a legal analysis is required, Sagemont Tax coordinates an external legal memorandum or opinion free of additional charge to our clients.