The Potential Impact of the Recent Loper Bright Decision on the ERC

What’s the potential impact of the recent Loper Bright decision on the Employee Retention Credit (ERC) for businesses and exempt organizations?

In a recent landmark decision, the U.S. Supreme Court’s (USSC) ruling in the Loper Bright Enterprises v. Raimondo case has altered federal tax law (and other laws) as it stands today and will likely play a considerable role in how courts interpret and enforce regulations issued by government agencies, like the IRS. This ruling overturned the long-standing Chevron doctrine, which had been in effect for nearly 40 years. This decision may have significant implications for employers who received Employee Retention Credit (ERC) refunds (or who submitted ERC claims that have not yet been processed) and face the possibility of IRS scrutiny of their claims.

Background: The Chevron Doctrine

The Chevron case, handed down in 1984, provided a doctrine, or framework, for courts to defer to a government agency’s interpretation of a statute if the statute was ambiguous and the agency’s interpretation of the statute was reasonable. The Chevron doctrine has been used extensively to uphold IRS regulations that added specific requirements to tax laws, such as those related to filing forms or meeting certain conditions not explicitly stated in the statute.

The Loper Bright Ruling and ERC Guidance

The Loper Bright ruling changes this approach, striking down the existing Chevron doctrine. Under the new standard, courts will no longer defer to an agency’s interpretation simply because it is reasonable. Instead, courts will now use their own independent judgment to determine whether a regulation aligns with the statutory language. If a regulation is found to exceed the bounds of the statute, it will be deemed invalid. This new approach will apply for review of regulations related to tax laws (and other laws) passed by Congress.  

This ruling could create challenges for existing tax regulations, particularly those that have been upheld under the Chevron doctrine. Regulations related to recent tax laws, such as the CARES Act, the Inflation Reduction Act (IRA), and the Tax Cuts and Jobs Act (TCJA), are likely candidates for such legal challenges.

As it relates to the ERC under the CARES Act, IRS guidance was not in the form of regulations. Instead of actual regulations, the IRS issued notices and other updates referred to as “sub-regulatory guidance.” ERC guidance was published in the form of multiple IRS notices and did not follow the normal process of drafting and finalizing regulations due to the circumstances presented and the need to provide guidance in an expedited manner. The initial and most meaningful ERC notice published by the IRS was Notice 2021-20. This notice and subsequent notices and announcements are merely the interpretation of the ERC statute by the IRS. The USSC’s ruling in Loper Bright will likely bring into question the reasonableness of these IRS interpretations. 

Implications for Employers with ERC Claims

In review of the statutory language of the ERC found in Section 3134, the IRS interpretation as presented in Notice 2021-20 and subsequent notices will be subject to scrutiny as employers are compelled to defend their ERC claims in the context of IRS enforcement action. Consider this example:

The statute provides for two ways in which an employer could be deemed eligible for the ERC in a particular calendar quarter of 2020 or 2021. Many employers determined they were eligible for the ERC because they were subject to a full or partial suspension in their operations due to a government order. However, the definition of a full or partial suspension remains vague. The actual statute defines an eligible employer as:

“Any employer who was carrying on a trade or business during the calendar quarter for which the credit was determined, and, with respect to any calendar quarter, for which the operation of the trade or business is fully or partially suspended during the calendar quarter due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to the coronavirus disease 2019 (COVID–19).”

Next, we will review the IRS’s interpretation of a full or partial suspension from a government order. Notice 2021-20 provides that an essential business is partially suspended if a government order has a “more than nominal” impact on their operations. The notice further defines “more than nominal” as more than 10% using either an hours or gross receipts test.

Prior to Notice 2021-20, the IRS had issued FAQs on its website to provide employers and their advisors with guidance(IRS website guidance had even less authority than IRS notices).The definition of “more than nominal” was the subject of much debate at that time, as some speculated that the threshold could be as low as a 2% impact on a business’ operations, based on this term being defined in other parts of the tax code or in actual court decisions. Ultimately, this was defined as more than 10%. Notice 2021-20 and its interpretation of what constitutes a full or partial suspension could be challenged by employers and their attorneys, and then possibly deemed unreasonable by the courts. Many other provisions of this notice, subsequent notices, and IRS guidance could also be revised, rejected, or otherwise deemed unreasonable based on the Loper Bright decision.

Next Steps

The IRS is now actively reviewing, auditing and litigating numerous ERC claims. Many employers received ERC refunds but lack the documentation to support their ERC eligibility for one or more quarters. For those employers, this recent development may not provide any new opportunities to defend their ERC claim, as no documentation is most often treated as unacceptable by the courts, as the statute expects a taxpayer to have supporting documentation for all information reported on their tax return.

Other employers may have documentation to support their ERC claim, but it may not comply with the IRS guidance upon audit. For those employers, Loper Bright provides some opportunity to challenge the IRS interpretations of the statute. Interpretations of what is a government order or what is a partial suspension are likely to be decided by the courts. 

It is critical to prepare for the potential IRS scrutiny of your ERC refund claim, even if the documentation may not meet the standards set in the IRS guidance. Our advisors can help you evaluate the credibility of your ERC claim and your supporting documentation. Please contact a Sikich team member here.

About Our Authors

Andrew Creedon, CPA, CFE, has deep audit and consulting experience, specializing in assurance services, internal controls, financial process improvement, internal audit, compliance, fraud investigations, and litigation consulting and support. He serves nonpublic entities, government contractors, not-for-profits organizations and public sector businesses.

Tom Bayer, CPA, CExP, has specialized expertise in the areas of business succession planning, tax planning and compliance, and business advisory. He has deep experience providing a range of accounting, tax, and business advisory services to commercial clients across industries.

Kellie Fedkenheuer, CPA/CFF, CFE, oversees and manages litigation support, forensic accounting and consulting engagements. She has assisted government agencies, government contractors, and commercial clients with claims related to both public and private projects.