Be Prepared for IRS Audits of COVID-19 ERC Claims

Jim Quaid, CPA

The availability of Employee Retention Credits (ERCs) during the height of the COVID-19 pandemic — particularly the ability to claim advance payments of the credits — played a critical role in keeping many not-for-profit organizations afloat. Now, however, the IRS has begun to subject some employers that claimed ERCs to audits. Given the extended five-year statute of limitations for such audits, not-for-profit organizations that claimed the credits need to be prepared, should the IRS come calling.

ERC in a nutshell

The ERC is a refundable tax credit intended for businesses, including not-for-profits, that 1) continued paying employees while they were shut down due to the pandemic or 2) suffered significant declines in gross receipts from March 13, 2020 to September 30, 2021. The 2021 credit generally is worth up to $7,000 per qualifying employee per quarter and up to $5,000 per qualifying employee per year in 2020, and its refundable nature makes it valuable for not-for-profits and businesses alike.

Specifically, an eligible employer must have:

• Sustained a full or partial suspension of operations because of orders from a governmental authority that limited commerce, travel or group meetings due to COVID-19 during 2020 or the first three quarters of 2021; or
• Experienced a significant decline in gross receipts during 2020 or a decline in gross receipts in the first three quarters of 2021.

Importantly, for any quarter, the ERC could not be claimed on wages that were reported as payroll costs in obtaining Paycheck Protection Program (PPP) loan forgiveness or that were used to claim certain other tax credits.

Related Read: IRS Issues ERC Guidance as Congress Mulls Early Termination

IRS scrutiny

It is worth noting that being selected for an audit does not mean that your organization did anything wrong. However, if you did claim the ERC improperly, you will likely be required to repay the credit, as well as penalties and interest.

The ERC did come with several potential tripwires for employers. For example, the IRS may look closely at your eligibility for the credit (including your calculation of your average number of full-time employees in 2019 and subsequent quarters), determination of gross receipts, calculation of the credit amount and application of the complicated aggregation rules (if applicable).

Now is the time to review your ERC analyses and ensure you have all assumptions and related supporting information documented. You are required to maintain adequate documentation for at least four years after the related employment taxes became due or were paid, whichever was later. Documentation may include:

• Payroll journals;
• Health plan expenses;
• Tax forms;
• Employee rosters;
• Copies of governmental suspension orders;
• Records showing declines in gross receipts for each relevant quarter;
• Documents related to PPP loan forgiveness and allocation of wages between ERC and PPP wages; and
• Federal employment tax returns.

Do not wait to receive an examination notice from the IRS. Make sure you have the proper documentation now.

Related Read: Businesses Provided a Lifeline: CAA Enhances PPP Loans and Extends Employee Retention Credit

Final word of caution

If you relied on outside companies  when claiming the ERC, do not assume you are on solid ground. The IRS has warned employers to be wary of companies  that charged large upfront fees or fees based on the amount of the refund, or that encouraged ineligible organizations to claim the ERC. The IRS alert highlights the importance of working with experienced and trusted tax experts. Please reach out to your ORBA advisor for any questions regarding ERC.

For more information, contact Jim Quaid at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Not-For-Profit Group.

What’s the Magic Number? Some Guidelines for Determining Your Board’s Size

KEN TORNHEIM, CPA, CFE

Recruiting and retaining committed board members is a never-ending process. For many not-for-profits, determining an appropriate-sized board takes time. Although state law typically sets the minimum number of directors a not-for-profit must have on its board, it is up to each organization to determine how many board members it needs. Once your board size meets its state requirement, what should you consider? Both small and large boards come with perks and drawbacks.

Related Read: A Proactive Approach to Not-For-Profit Board Member Management

Small boards

Smaller boards allow for easier communication and greater cohesiveness among the members. Scheduling is less complicated, and meetings tend to be shorter and more focused. Plus, the members’ higher level of involvement can heighten their satisfaction.

Several studies have indicated that group decision-making is most effective when the group size is five to eight people. But boards on the small side of this range may lack the experience or diversity necessary to facilitate healthy deliberation and debate. Members may also feel overworked. This can lead to burnout and an early departure.

Large boards

Burnout is less likely with a large board where each member shoulders a smaller burden, including when it comes to fundraising. A large board may include more perspectives and a broader base of professional expertise, such as financial advisors, community leaders and former clients. Large boards typically foster strong institutional memories and provide more extended outside networks.

On the other hand, larger boards can lead to disengagement because members may not feel they have enough responsibilities or sufficient voice in discussions and decisions. Larger boards also require more staff support and can strain the CEO or executive director, who must develop a relationship with each member.

Making choices

If you are thinking about resizing your board, think about:

• The current sentiment about its size;
• Board member responsibilities and desirable expertise;
• Fundraising needs;
• Committee structure;
• Your not-for-profit’s life stage (for example, start-up or mature);
• The size of your organization’s staff; and
• The complexity of the issues facing the board.

You may have heard that it is wise to have an uneven number of board members to avoid 50/50 votes. In such a case, though, the chair can break a tie. Moreover, an issue that produces a 50/50 split usually deserves more discussion to come closer to consensus.

Related Read: Diversity on Not-For-Profit Boards

Downsizing carefully

If you decide a larger board is in order, you likely already know how to recruit more members. Trimming the board is a trickier situation. For starters, you might need to change your bylaws. Generally, it is best to set a range for board size in the bylaws, rather than a precise number. Your bylaws already might call for staggered terms, which makes paring down simpler. As members’ terms end, just do not replace them.

If part of the motivation for reduced board size is a lack of engagement, you could establish an automatic removal process. For example, members may be removed for missing a specified number of meetings. Make sure to remind exiting board members that the board is not the only way they can serve the organization, as there are likely many volunteer opportunities—including committee responsibilities—within the organization.

Finding the sweet spot

There is no board member size “sweet spot” that will work for every organization. In fact, it may take several attempts to find the right size for your organization. Consult your legal and tax professionals for help in making changes to your board’s size.

For more information, contact Ken Tornheim at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Not-For-Profit Group.