The IRS released an Office of Chief Counsel memorandum dated June 30, 2023, on July 21, 2023. The subject of this memorandum was: Whether an Employer Experienced a Full or Partial Suspension of the Operation of a Trade or Business under Section 2301 of the Coronavirus Aid, Relief, and Economic Security Act or Section 3134 of the Internal Revenue Code due to a Supply Chain Disruption.

The IRS has clarified that employers who were hampered by supply-chain disruptions during the pandemic but were not shut down are not eligible for an employee retention tax credit aimed at encouraging companies to keep their employees on their payroll. The memorandum states that “A supply chain disruption, by itself, does not rise to the level of a full or partial suspension primarily because no governmental order applies to the employer’s operations.”

The guidance does allow the employer to step into the shoes of its supplier for purposes of the suspension test. The supplier must have been subject to a governmental order that causes the supplier to suspend its operations.

To read the full memorandum, go to https://www.irs.gov/pub/lanoa/am-2023-005.pdf.

In addition to this further guidance from the IRS, we are seeing increased review procedures being applied to current claims being filed.

The IRS issued form 4564 (Information Document Request) to a client for information necessary to determine if they are eligible for the employee retention credit requested on form 941-X. The request must include the following items.

1. Work papers that were used to prepare Form 941-X
2. Documentation that you are an eligible employer for the purposes of the employee retention credit based on either a significant decline in gross receipts or full or partial suspension of operations. The significant decline in gross receipts should include the records used to determine that the organization experienced a significant decline in gross receipts from the same quarter in 2019 and/or the governmental order which caused a full or partial suspension of the operations. In addition, the records relied upon to determine whether more than a nominal portion of operations were suspended due to a governmental order or whether a governmental order had more than a nominal effect on the business operation.
3. Documentation of the average number of full-time employees employed during the year(s)
4. Documentation of the calculation of the ERTC, which include records of which employees received qualified wages and in what amounts and for a larger employer, records showing that the wages were paid for time the employee was not providing services. In addition, documentation to show how the allocable qualified health benefits were determined.
5. If you are a member of an aggregated group, how you determined you were a member and how did the aggregation affect the determination and allocation of the credit?
6. If you received a PPP loan, was any portion of the loan forgiven? If so, provide a copy of the documentation of the PPP loan forgiveness that included payroll, such as the forgiveness application.

Employers should be aware that the IRS can challenge previously paid employee retention credit refunds under the erroneous refund provisions. In addition to the statute of limitations, the government has two years from when it pays an ERTC refund to bring suit to recover the refund if it later determines the taxpayer was ineligible.

We anticipate that both current and previously filed employee retention tax credit requests will continue to receive increased scrutiny over the coming years from the IRS. We recommend that you prepare for this inquiry if you have claimed ERTC credit and are ready to respond.

Leon M. (Lonnie) Rogers, CPA/ABV/CFF is the managing member of Tetrick & Bartlett, PLLC and has been providing accounting, tax, valuation and consulting services to automobile dealers since 1977. Tetrick & Bartlett, PLLC currently serves over 50 dealers in West Virginia, Virginia, Ohio and Pennsylvania and is a member of the AutoCPA Group, a nationwide organization of CPA firms specializing in services to automobile dealers. Lonnie can be reached at lrogers@tb.cpa or 304-624-5564.