Editor: Valrie Chambers, CPA, Ph.D.
COVID-19 legislation enacted in March 2020 created significant temporary employment tax credits to help employers continue to pay workers even if they were unable to work due to illness, child care needs, or reduced business activity. The first credits, created by the Families First Coronavirus Response Act (FFCRA), P.L. 116-127, were for paid sick and family leave provided by employers with fewer than 500 employees. The Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, created the employee retention credit (ERC), available to all businesses that continued to pay workers during the pandemic and met specific criteria.
This item focuses on documentation required in claiming these COVID-19 employment tax credits. It does not delve into the operational details. For that, see other articles in The Tax Adviser, AICPA member resources, and, of course, the public laws and guidance from the IRS. The table, "Summary of Key Elements of the COVID-19 Employment Tax Credits," provides a brief summary of the FFCRA and CARES Act employment tax credits as enacted and as modified by later laws.
The IRS calls for extensive documentation for these COVID-19 employment tax credits. For the ERC, the requirements are provided in a notice that is binding guidance. For the FFCRA paid leave credits, the extensive documentation requirements are only in nonbinding FAQs (see Nellen, "Categorizing FAQs in the Guidance Sphere," 52 The Tax Adviser 60 (January 2021), which raises a question of whether these FAQs go beyond what the public laws and Sec. 6001 require. While the IRS announced a new process to make some FAQs "authority" for Sec. 6662 purposes (IR-2021-202; Oct. 15, 2021), it does not apply to all FAQs. The new process only raises the reliance possibility for FAQs issued as a news release and fact sheet on newly enacted legislation and "emerging issues." For other FAQs, such as ones about COVID-19 employment credits, they are not binding law or authority (unless reissued as a news release and fact sheet).
FFCRA paid leave credits documentation
The enacting legislation for the paid sick and family leave under the FFCRA provides that Treasury is to issue "regulations or other guidance to minimize compliance and record-keeping burdens under this section" (P.L. 116-127, Sec. 7001(f)(2); see also Sec. 7004(d)(2)). No regulations, revenue ruling, revenue procedure, or notice was issued on recordkeeping or documentation for the FFCRA paid leave credits.
Over 100 FAQs about the paid leave and credits were issued by the IRS as well as another 100 by the U.S. Department of Labor (DOL). The DOL administered compliance with the mandatory nature of the paid leave for 2020, not eligibility for the tax credits (see DOL FAQs 15 and 16, available at www.dol.gov; also see DOL Temporary Rule §826.100 (85 Fed. Reg. 19326 (April 6, 2020))). The IRS FAQs on documenting the paid leave credits are extensive.
FAQ 4 provides that the employer must retain records and documentation supporting each employee's leave to support the credit claim. In addition, employers must retain Form 941, Employer's Quarterly Federal Tax Return, Form 7200, Advance Payment of Employer Credits Due to COVID-19, and any other filings requesting the credit (FAQ 4, available at www.irs.gov). FAQs 44 to 46a describe significant details for written records from the employee and employer (available at www.irs.gov). This documentation includes:
- A written leave request from the employee with the employee's name, dates for the requested leave, the COVID-19 reasons for the leave with written support, and a statement that the employee is unable to work or telework due to this reason.
- If the leave pertains to the need to care for a child, such as due to school closure, the written statement must include the name and age of the child, the name of the school, and a statement that no one else is available to care for the child.
- Documentation by the employer of how the qualified wages and credits were computed (Form 941 includes worksheets that should help with this).
- Copies of Forms 941 and 7200.
FAQs 64 to 67, pertaining to the paid leave credits as extended and modified by the American Rescue Plan Act (ARPA), P.L. 117-2, call for similar written documentation with supporting proof (available at www.irs.gov). They also cover leave for new reasons added by ARPA, including to obtain a vaccination or recover from one; documentation for such leave should include the date of vaccination.
FAQ 46 states that records should be maintained for at least four years after the date the tax was due or paid, whichever is later. For the credit extension by ARPA for April 1, 2021, through Dec. 31, 2021 (subsequently ended on Sept. 30, 2021, by the Infrastructure Investment and Jobs Act, PL. 117-58, for employers other than recovery startup businesses), the statute of limitation was extended to five years. Thus, for any paid leave credit claimed during this time (per Secs. 3131(f)(6) and 3132(f)(6), added by ARPA), records should be kept at least six years (this is also noted in IRS FAQ 66).
While the DOL FAQs and temporary rule on documentation are not binding for the tax credits, it is interesting that the DOL states that the information from the employee can be provided either orally or in writing. However, these DOL FAQs add that employees must provide written documentation to support leave per "IRS forms, instructions, and information" (see DOL FAQ 16, available at www.dol.gov).
IRS guidance on how to document the ERC is also in a Q&A, but this information is binding guidance, as it is published in Notice 2021-20 (Section III. N., Q&A 70). These records should prove that the employer is eligible and paid qualified wages. This notice applies to the ERC as enacted by the CARES Act and in effect from March 12, 2020, to Dec. 31, 2020. The documentation called for includes:
- Any governmental order suspending the employer's business operations.
- "Any records the employer relied upon to determine whether more than a nominal portion of its operations were suspended due to a governmental order or whether a governmental order had more than a nominal effect on its business operations."
- Records supporting the decline in gross receipts (if this eligibility requirement is used rather than the government order requirement).
- Records showing which employees received qualified wages and the amounts. For large employers, these records need to show wages paid for the employees not working.
- Support for how allocable qualified health plan expenses were computed for the ERC.
- Copies of Forms 941 and 7200.
Notice 2021-23 provides guidance for the ERC as it applied for the first six months of 2021. Compared with Notice 2021-20, it includes much less information on required documentation. Its single paragraph on the topic states:
Eligible employers must maintain documentation to support the determination of the decline in gross receipts, including which calendar quarter an eligible employer elects to use in measuring the decline. An election to use an alternative quarter to calculate gross receipts is made by claiming the employee retention credit for the quarter using the alternative quarter to calculate gross receipts.
Despite this brevity, Notices 2021-23 and 2021-49 include statements that the rules included in Notice 2021-20 continue to apply for 2021 where the 2020 and 2021 provisions are the same. Thus, the documentation requirement laid out in Notice 2021-20 applies for all periods that the ERC was in effect.
As with the paid leave credit, ERC records should be kept for four years (six years for the ERC as extended and modified by ARPA (Sec. 3134(l)) and the Infrastructure Investment and Jobs Act, P.L. 117-58, for wages paid in the third quarter of 2021).
Observations and reminders for clients
Sec. 6001 provides that taxpayers are to keep records as rules and regulations specify and to support their tax liability. Regs. Sec. 1.6001-1(a) calls for maintaining permanent books or records "sufficient to establish the amount of ... credits." For the paid leave credits and the ERC, documents supporting eligibility and the amount of the credits seem appropriate for Sec. 6001 purposes.
However, for the paid leave credits, what if an employer does not have the written statements and related support from employees, but, instead, the employer obtained that information verbally? This is contrary to what the FAQs require for the paid leave credits. However, the FAQs are not binding law.
The best approach for employers and their tax advisers is to be sure all the support noted by the IRS is available. It is likely, given that IRS information was released after the start date of the credits, and business operations and lives were disrupted by the pandemic, that employers who claimed the paid leave credits do not have all the written details needed from employees. If you are unsure if these records exist, it is a good idea to remind clients sooner rather than later (such as during an IRS audit) of the need for them, as the employees might not be working with the employer anymore or may have difficulty getting old records.
Should an employer's paid leave credits be examined and denied due to lack of the specific documents and statements called for in FAQs, an argument should be made that the FAQs are not binding and that Sec. 6001 applies.
For the ERC, the documentation requirement is in a notice that is binding guidance from the IRS. Again, employers and their tax advisers will have greater confidence they calculated the ERC properly and less concern if they are examined if they have the documentation for all quarters they claimed it.
Finally, guidance on COVID-19 law changes continues to emerge, so be sure to monitor FAQs and official guidance for any new requirements. In addition, the Infrastructure Investment and Jobs Act eliminated the ERC for most employers for the last quarter of 2021.
Valrie Chambers , CPA, Ph.D., is an associate professor of accounting at Stetson University in Celebration, Fla. Annette Nellen, Esq., CPA, CGMA, is a professor in and director of the MST Program at San José State University in San José, Calif., and a past chair of the AICPA Tax Executive Commmitte. Prof. Nellen is a member of the AICPA Tax Practice & Procedures Committee. For more information on this column, contact firstname.lastname@example.org.