https://www.irs.gov/pub/lanoa/am-2023-005.pdf
Overview
The recent Generic Legal Advice Memorandum (GLAM) released late last month by Rachel Leisure Levy, Associate Chief Counsel of the IRS, has shed light on a crucial aspect of claiming the Employee Retention Tax Credit (ERC). The memo specifically addresses the topic of “Full or Partial Suspension[s] of the Operation of a Trade or Business” due to supply chain disruptions and their impact on eligibility for the ERC. This has significant implications for businesses, especially those that may have illegitimately capitalized on the credit through scammy providers that are commonly referred to as “ERC mills.”
Implications of the Memorandum:
The memorandum adopts a strict interpretation of what constitutes a “full or partial suspension.” It clarifies that supply chain disruptions alone do not qualify as a basis for suspension, as they lack a direct link to orders from governmental authorities. This limits the scope of eligible employers to those that can clearly demonstrate a direct impact of governmental orders on their business operations.
With the memo’s guidance, employers seeking to claim the ERC must now provide concrete evidence and documentation substantiating that their suspension of operations was DIRECTLY caused by a governmental order affecting their suppliers. This requirement aims to ensure transparency and accountability in claiming the credit.
The IRS memorandum highlights the importance of maintaining accurate records and documentation. Employers must keep proper records to demonstrate their eligibility for the ERC based on legitimate full or partial suspensions. This practice not only ensures compliance but also helps businesses avoid potential audits and penalties.
Conclusion:
The IRS memorandum brings clarity and specificity to the issue of claiming the Employee Retention Credit in the context of supply chain disruptions. By defining the parameters of a qualifying suspension and requiring substantiation, the IRS aims to prevent abuse of the credit and protect legitimate businesses. Employers must now be diligent in ensuring compliance with the established criteria and maintain thorough records to substantiate their eligibility for the ERC. Hopefully this clarification from the IRS will deter many of these “ERC mills” from taking advantage of unsuspecting taxpayers.
