In an article published in Tax Notes Today Federal on November 23, Julie Foerster of the IRS Small Business/Self-Employed Division was quoted as stating at the virtual New England IRS Representation Conference on November 19 that the IRS will begin training agents to audit employee retention credits (ERC) in the February-March time period, with exams to begin based on the rollout and completion of training.[1]

The article also quoted Daniel Mayo of Withum Smith+Brown PC regarding the types of employers likely to be selected for such exams:

Daniel Mayo of Withum Smith+Brown PC said many taxpayers are wondering how the IRS will choose which businesses to audit. “Obviously, the size of the credit could be an issue, but we’ll be fascinated to see over time whether the IRS starts using” North American Industry Classification System codes, he said, referring to a coding regime for classifying business activities.

“We would expect, for example, restaurants and venues to be audited with less frequency than certain other industries, because [the ERC] was really designed for industries like restaurants,” Mayo said.[2]

The article reports that Ms. Foerster responded to this statement by stating the agency is developing “all of that” (presumably selection criteria) right now.[3]

Certainly, the IRS’s previous guidance, such as in Notice 2021-20,[4] has indicated the IRS believes that restaurants will generally qualify for the credit when subject to various restrictions, with examples not requiring the restaurant to demonstrate, for instance, that the loss of some or all inside dining due to COVID-19 governmental restrictions led to an actual reduction of revenues or inability to serve customers (see Q&A 17 of Notice 2021-20, Examples 1 & 2). Such revenues may have been made up by an increase in drive through or take-out orders, especially for fast food restaurants. As well, the restaurant might have been able to serve all of the dine in customers that arrived at the restaurant even with the reduced number of tables—the restaurant would still be considered to have a partially suspended business.

Conversely, a retail business that was subjected to a limited number of customers per square foot in its building was required to show an inability to serve customers due to this restriction in Example 6 of Q&A 17 of Notice 2021-20.

It must be noted that there’s a world of difference between an IRS representative talking about potential future IRS actions and the actual implementation of such actions, so there’s no assurance that a significant program for looking into ERC claims of taxpayers in exams will actually materialize.

But it does remind advisers that we do need to consider the quality of the authorities we look to rely upon when advising clients regarding such claims. Regardless of whether the IRS actually commences examinations, advisers are still required to be able to justify any positions on returns or claims prepared by the adviser or positions we advise clients they could take on such returns or claims. We also should remember to remind clients that these returns are subject to examination, and that for the third and fourth quarter of 2021 ERC claims, the IRS has five years to raise such challenges.[5]

[1] Kristen A. Parillo, “IRS Gearing Up for Audits of Employee Retention Credits,” Tax Notes Today Federal, November 23, 2021,

2021 TNTF 225-2, (https://www.taxnotes.com/tax-notes-today-federal/audits/irs-gearing-audits-employee-retention-credits/2021/11/23/7cmlm, subscription required, accessed November 25, 2021)

[2] Kristen A. Parillo, “IRS Gearing Up for Audits of Employee Retention Credits,” Tax Notes Today Federal, November 23, 2021

[3] Kristen A. Parillo, “IRS Gearing Up for Audits of Employee Retention Credits,” Tax Notes Today Federal, November 23, 2021

[4] Notice 2021-20, March 1, 2021, https://www.taxnotes.com/research/federal/irs-guidance/notices/irs-issues-q%26a-guidance-on-employee-retention-credit/38wlw?h=2021-20 (retrieved November 25, 2021)

[5] IRC §3134(l)