According to Issue Number 2023-02, since the Fall of 2022, the IRS has issued several warnings to employers to beware of third parties promoting improper Employee Retention Credit (ERC) claims. See IRS IR-2023-40 (Mar. 7, 2023); IRS IR-2022-183 (Oct. 19, 2022); COVID Tax Tip 2022-170 (Nov. 7, 2022). With tax filing season in full swing, tax professionals are requesting guidance to ensure they are meeting their Circular 230 professional responsibilities and the standards required to prepare and sign original tax returns, amended returns, or claims for refund relating to these credits.

The ERC is a refundable tax credit enacted by Congress in 2020 under the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act). It is available for businesses (employers) who continued to pay employees during a shutdown due to the COVID-19 pandemic or who experienced significant declines in gross receipts from March 13, 2020, to December 31, 2021. To be eligible for the ERC, employers must meet certain criteria such as sustaining a full or partial suspension of their business operations due to COVID-19, experiencing a significant decline in gross receipts, or qualifying as a recovery startup business.

The IRS has warned employers about third-party advisers promoting improper ERC claims, leading some employers to claim excessive ERCs based on improper positions. The IRS has also urged affected employers to file amended returns to correct the excessive ERC claims and minimize interest charges and possible penalties. Furthermore, the IRS Criminal Investigation Division and the US Department of Justice have initiated criminal investigations and, in some cases, indictments against promoters (and other enablers) of excessive ERC claims.





Tax professionals must fulfill their professional obligations to clients and to tax administration by meeting the applicable provisions in Circular 230, Regulations Governing Practice before the Internal Revenue Service. Circular 230 has several provisions that are implicated when dealing with a client who has claimed or is seeking to claim an ERC.

Tax professionals must exercise due diligence in preparing and filing tax returns or other documents on a client’s behalf with the IRS and in ensuring the correctness of the practitioner’s written or oral representations to clients and the IRS. Practitioners must make reasonable inquiries of clients to confirm eligibility for the ERC and to determine the correct amount of the credit. If a practitioner cannot reasonably conclude that the client is or was eligible to claim the ERC, then the practitioner should not prepare an original or amended return that claims or perpetuates a potentially improper credit.

When a practitioner assists or advises a client in reporting income or other items on a tax return, filing amended returns or claims for refund, or with positions taken on a return or claim for refund, the standards in Circular 230 apply to the practitioner’s activities. Tax professionals must also advise clients of any potential penalties likely to apply to a position taken on a tax return the practitioner prepares for the client.

In conclusion, tax professionals must have an in-depth knowledge of the ERC and its eligibility criteria when entering into an engagement with a client who has claimed the ERC, wants to claim it, or asks about the possibility. They must also follow Circular 230’s requirements of due diligence, full disclosure to clients of their tax situation, and reasonable reliance on client-provided information and any advice provided by another tax professional. If a practitioner has reason to believe that a client’s excessive ERC claim is owing to the client’s reliance on erroneous or improper advice from another practitioner, they should advise the client of the overstated claim and any additional tax and penalties that could apply and, if requested, competently assist the client in correcting or mitigating the problem.