Latest IRS Guidance Demonstrates the Limited Basis for Claiming the ERC under a Supply Chain Disruption Theory
Does the disruption of an employer’s supply chain during the Covid pandemic qualify them for the Employee Retention Credit (“ERC”)? The IRS is leaning towards no.
In a Generic Legal Advice Memorandum (“GLAM”), dated June 30, 2023, the IRS illustrated five separate scenarios in which a disruption to an employer’s supply chain do not qualify the employer for the employee retention credit. At first blush, the position taken in the GLAM seems counter to the IRS position taken in Notice 2021-20. In reality, however, the GLAM’s treatment of each specific scenario is consistent, albeit restricting.
While the GLAM has no precedential value, it certainly indicates the IRS position regarding whether a supply chain disruption may qualify an employer for the ERC. And staying within the IRS position is one way to mitigate the risk of future audit adjustment. In that context, the GLAM provides several key takeaways most employers looking into the ERC can benefit from.
In short, the GLAM’s primary takeaways are that ERC claims from supply chain-based suspensions of operations have the same requirements as any other partial suspension claim. An applicable governmental order must have caused the supplier to suspend its business operations, and that suspension must have caused the employer claiming the credit to suspend its business operations.
An employer must be able to substantiate and provide the government order on which their claim is based. Additionally, the employer must be able to substantiate the link between the order, the supplier’s suspension, and how that caused the employer’s suspension. An employer that does not produce the government order on which their ERC claim relies will not be considered to have a partial suspension, and an order not in effect during the quarter claiming ERC will not be considered a valid basis for a partial suspension.
Dramatic increases in price or the inability to offer some, but not all, goods or services does not rise to the level of a partial suspension. While such issues may have affected an employer’s operations, and could very well have been Covid-related, the GLAM emphasis the test requires that a governmental order cause the suspension, not that the pandemic created hardships.
The GLAM indicates the IRS will review ERC claims using a strict interpretation of the statutory language creating it. Therefore, it is essential employers carefully analyze their eligibility and substantiation prior to submitting their claim(s).
Eligibility for the ERC is not always black and white. Though many businesses experienced hardships for numerous reasons during the pandemic, it is important to remember that does not necessarily qualify them for the ERC. Eligibility must be determined using the statute and applicable regulations, and employers should ensure they can substantiate how they qualify based on the legal framework.
Employers who claimed the ERC based on supply chain disruptions should ensure they have all the proper documentation to substantiate such claim, including, but not limited to, a copy of the government order which the employer’s claim is based on. If an employer utilized a third-party to prepare the claim based on supply chain disruptions, the employer should obtain the above documentation BEFORE claiming the ERC. If the third-party preparer will not provide those documents, the employer should seek a separate opinion from a trusted tax professional.
 Again, however, the GLAM cannot be cited or used as precedent and, accordingly, cannot be relied on to avoid penalties or defend a position. Staying within the confines of positions taken in the GLAM does not guarantee an employer’s claim will be approved, will go unaudited, or will go otherwise unchallenged. Therefore, while perhaps a helpful tool in determining eligibility for ERC, an employer should not attempt to substantiate or corroborate their ERC claim using the GLAM alone. Rather, an employer must make a determination based on all of the facts and circumstances specific to them, as well as all relevant statutes and regulations.
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