Revised - ERC Engagement Letter Example Attached
Sitting down in the evening to watch some TV, and every hour or so, there is an ERC commercial from one of those ERC mill shops. One commercial has the business owner saying, “I asked my CPA about it, and they said I did not qualify, but in a matter of minutes, fill in the blank company got my ERC tax credits.” Danger Will Robinson should come to mind……
The intent of this alert is to inform insureds of the potential and high probability of ERC claims receiving heightened IRS attention. Recently, the IRS has publicly stated enforcement will be severe. (See attached IRS IR 2023-135) https://www.irs.gov/newsroom/irs-commissioner-signals-new-phase-of-employee-retention-credit-work-with-backlog-eliminated-additional-procedures-will-be-put-in-place-to-deal-with-growing-fraud-risk.
The risk management team at McGowan Pro is concerned with the many professional liability exposures that may arise from providing this type of service. This alert is intended to identify the exposure and provide some best practices to reduce the potential for professional liability claims and or ethical violations. This alert isn’t intended to provide technical guidance with respect to the ERC.
The following areas are the focus of this alert:
1. Amending 941s -While CPAs may or may not be amending the 941s, many third-party promoters have advertised and reached out to CPAs regarding their eligibility for the credit. Either way, properly drafted engagement letters for the amended 941s are a must (see attached McGowanPRO’s amended tax return engagement letter). In addition, the strict rules for eligibility for the ERC must be followed. It should be noted the statute of limitations for IRS examination has increased by two years, making it a five-year statute.
2. Reliance on 3rd party 941 amendments - Of utmost concern is the scenario where the CPA isn’t preparing the ERC claim (amended 941s) and that service is being performed by a 3rd party. It’s here where the CPA assumes there is little responsibility. However, since the ERC generates a taxable event, the entity’s business tax filing requires amendment, as would partners, shareholders, or members for flow-thru entities. CPAs need to be aware of AICPA SSTS#1, which enunciates the requirement for tax return positions and the possibility of disclosure of a position on forms 8275 and 8275R. Essentially, the CPA cannot just accept 3rd party material and simply amend returns. Many standards need to be followed. (AICPA SSTShttps://www.aicpa-cima.com/resources/toolkit/statements-on-standards-for-tax-services)
(Attached McGowan Pro ERC Engagement letter)
3. Contingent fees -Many State Board of Accounting rules and regulations and U.S. Treasury circular 230 prohibit the receipt of a contingent fee for original tax returns and certain amended tax filings (See attached IRS circular 230 and refer to section 10.27). Consequently, the CPA engaged to apply for an ERC must be mindful of these rules when negotiating fees for services. While there are exceptions, and each situation may vary, strict adherence to these rules is essential.
4. Financial reporting -Perhaps the one area given very little attention would be the financial reporting ramifications of the ERC. Many standards may apply, including, but not limited to, Independence, Non-Compliance with laws and regulations), contingencies, uncertain tax positions, and selective disclosure in compiled financial statements.
For example, the insured could adopt a policy of not doing such work for clients when it did not amend the 941s. Short of that, it should not simply accept the third party’s eligibility conclusion; it must do its own analysis, obtaining documentation to support the third party’s conclusions. If, after doing its own analysis, it is skeptical of or uncomfortable with what the third party did, the insured could insist on making a disclosure in the return of an uncertain tax position. And the insured should probably insert some disclaimer language in its engagement letter along the following lines:
You have informed us that you used a third-party company to claim the Employee Retention Credit (“ERC”), originally enacted under the 2020 Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and as subsequently amended. We had no role in that process. Our services in preparing your 2022 income tax returns do not include rendering an opinion of any kind concerning your qualification for the ERC. The only connection between the ERC you claimed and the returns we will prepare for you will be that we will report on your returns the cash you received during the subject tax year as a result of claiming the ERC. Consequently, you agree to indemnify us, defend us, and hold us harmless against any cost, settlement, judgment, fine, penalty, loss, obligation, sanction, claim, or other harm or proceeding that you or any third party may incur, suffer, or institute as a result of your ERC claim.
There is no guarantee that this provision will protect the insured from IRS scrutiny, but it may provide some help in that regard.