By James J. Newhard, CPA

The AICPA Tax Section presented a Tax Ethics Update webinar on Oct. 31, 2023. One scenario discussed related to an Employee Retention Credit (ERC) matter where a third-party company/provider prepared an ERC claim and then a tax practitioner is engaged to prepare the business’s tax returns. Ethics violations, mitigating factors, and best practices were discussed and shared.

From previous interactions with tax practitioners, I understand that many practitioners believe that they can simply accept the validity and appropriateness of an ERC claim prepared by another provider – including those pop-up ERC claim enterprises – as reliance on work of others, citing Circular 230 or the SSTS.¹ Well, I not only learned that I was correct in my contra position, but also was startled to learn that much had already been issued establishing and emphasizing the additional responsibilities of tax preparers!

Too often, practitioners do not read or research far enough. Some of us don’t delve into Sections 10.34 and 10.37 of Circular 230, or we stop reading after the first sentence of a cited SSTS without continuing to the caveats. Our Code of Professional Conduct is clear: a CPA may never subordinate their professional due care responsibilities. The Code of Conduct asserts the necessity for professional skepticism in matters of independence, so let’s be honest: what CPA hasn’t been skeptical of the entirety of the ERC phenomenon?

Here are a few other important ERC points shared by the AICPA Tax Section:

• As soon as an ERC claim is submitted there is a conflict with previously filed returns, thus there is a problem. A CPA tax professional cannot take the position, “Let’s see whether IRS accepts and pays-out on the ERC claim.”
• The taxpayer may elect to simply take the refunded ERC monies into income in the tax period when received rather than amending the 2020 and/or 2021 tax returns. That would constitute another tax return error.
• Every engagement that a CPA agrees to undertake should have an engagement acceptance process (another reason why tax engagement letters are essential), and no CPA can ignore assessing whether there might be errors or inappropriate positions taken in financial data that was contained in, or will be contained in, tax returns that the CPA prepared or would prepare. Therefore, the engagement cannot (should not) be agreed to until the CPA has performed some due diligence about possible tax errors.

Some might argue that the points raised by the presenters, which included PICPA’s own Ed Jenkins, CPA, were merely their own interpretations of professional guidance and responsibilities, the following make the CPA/tax practitioner responsibilities fairly clear.

Office of Professional Responsibility²  

In a March 7, 2023, alert from the Office of Professional Responsibility (OPR), Issue No. 2023-02, Appendix A, OPR reiterates that Circular 230 practitioners must meet the applicable provisions in Circular 230, Regulations Governing Practice before the Internal Revenue Service, when dealing with a client who has claimed or is seeking to claim an ERC.

While a Circular 230 practitioner may rely on client representations without verification, such good faith reliance “contemplates that a practitioner will make reasonable inquiries of a client to confirm eligibility for the ERC and to determine the correct amount of the credit. A practitioner may accept the client’s responses at face value if it is reasonable. But a practitioner may not ignore the implications of information the practitioner knows or has received from the client.”

So, considering the many potential cases of fraud in the ERC area, there is little possibility that a CPA’s professional skepticism would not give rise to concern within the CPA. By virtue of the CPA profession’s expertise in tax and financial reporting, as well as attest and nonattest professional services, we have good reason to adopt, apply, and fully exercise the aforementioned professional skepticism.

In that light, how many smaller CPA firms and sole practitioners have determined that a client does not have the requisite expertise in the applicable knowledge standards, whether that’s of the Internal Revenue Code or U.S. GAAP? With that perspective, how many small-firm practitioners can say – with a straight face – that they believe small-business clients have sufficient expertise to assess the certainty of their ERC claim? The OPR continues: “If the information from the client appears to be incorrect, incomplete, or inconsistent with other facts the practitioner knows, the practitioner cannot simply accept the client’s information, but must make further inquiries of the client to reconcile the incomplete, incorrect, or inconsistent facts.”

In the Conclusion section of the alert, OPR concludes, “When a practitioner enters into an engagement with a client who has claimed the ERC, wants to claim it, or asks about the possibility, the practitioner needs to have or gain an in-depth knowledge of the credit, especially its eligibility criteria. The practitioner must also follow Circular 230’s requirements of: (1) due diligence in the practitioner’s advice and in preparing and filing returns (including the specific standards in section 10.34); (2) full disclosure to a client of their tax situation; and (3) reasonable reliance on client-provided information and on any advice provided by another tax professional.”

AICPA & AON: ERC Professional Responsibilities³

A risk alert issued by the AICPA and liability insurer AON cites both Circular 230 and the SSTS pertaining to responsibilities, highlighting the red flag that a return containing an ERC claim position is, in fact, a tax position. A professional preparer must assess a tax position for a level of confidence to determine whether it must be accompanied by disclosure or whether or not the professional preparer may even be associated with the return. The AICPA has a guide pertaining to levels of confidence for tax return positions and the related IRS taxpayer and preparer penalty implications.⁴

The alert lays out this scenario: “CPAs may be asked to prepare original or amended payroll and/or business tax returns reflecting ERC. As such, CPAs may face a future professional liability claim if a client’s ERC is disallowed by the IRS, even if they did not calculate the ERC.” Given that the IRS may have up to five years to audit payroll returns with regard to the ERC, it is possible that the third-party companies who did the ERC for the client will be nowhere to be found. So, the one holding the proverbial bag will be the tax preparer.

The alert continues to cite the points made earlier regarding due care, Circular 230 Section 10.34, ERC as a tax position to be assessed, levels of confidence of the position, and the caveat of the cited SSTS paragraph that states, “However, a member should not ignore the implications of information furnished and should make reasonable inquiries if the information furnished appears to be incorrect, incomplete, or inconsistent either on its face or on the basis of other facts known to the member.”  

In the alert’s final thought, a rather serious conclusion is reached about continuing the tax engagement relationship: “Although positions taken on a tax return are ultimately the client’s responsibility, ERC represents a significant risk to CPAs and may lead to future claims. If a client fails to take the CPA’s advice or pressures the CPA to take an improper position, client termination may be the best option.”

¹ Circular 230 Section 10.22(b), Reliance on others. Except as modified by Sections 10.34 and 10.37, a practitioner will be presumed to have exercised due diligence for purposes of this section if the practitioner relies on the work product of another person and the practitioner used reasonable care in engaging, supervising, training, and evaluating the person, taking proper account of the nature of the relationship between the practitioner and the person. SSTS (pre-Jan. 1, 2024) No. 3, paragraph 2: In preparing or signing a return, a member may in good faith rely, without verification, on information furnished by the taxpayer or by third parties However, a member should not ignore the implications of information furnished and should make reasonable inquiries if the information furnished appears to be incorrect, incomplete, or inconsistent either on its face or on the basis of other facts known to the member Further, a member should refer to the taxpayer’s returns for one or more prior years whenever feasible.
² Professional Responsibility and the Employee Retention Credit  
³ Risk Alert – Aggressive Employee Retention Credit Calculations Can Create Professional Liability Risk  
⁴ www.aicpa-cima.com/resources/download/levels-of-confidence-for-tax-return-positions-chart

James J. Newhard, CPA, is a sole practitioner in Paoli, Pa., and a CPE presenter. He serves on numerous PICPA committees on A&A and tax matters, as well as the Pennsylvania CPA Journal Editorial Board. He is currently a member of the AICPA Joint Trial Board and formerly served on PEEC. He can be reached at jim@jjncpa.com.

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Statements of fact and opinion are the authors’ responsibility alone and do not imply an opinion on the part of the PICPA's officers or members. The information contained herein does not constitute accounting, legal, or professional advice. For actionable advice, you must engage or consult with a qualified professional.