IRS clarifies government orders for ERC claims

Executive summary: IRS indicates OSHA communications are not government orders

The IRS continues to issue additional guidance related to the Employee Retention Credit (ERC) in its attempt to combat scam promotions and ineligible credit applications. A recent memorandum clarifies the Service’s position on what is a government order and concludes OSHA communications generally do not suffice to establish eligibility for the ERC.

New IRS guidance clarifies definition of government orders for employee retention credit

As part of ongoing IRS efforts to combat widespread ERC fraud, the IRS released a new Generic Legal Advice Memorandum (GLAM) 2023-007 on Nov. 3, 2023. The memorandum offers insight into the IRS position on the use of OSHA communications as support for ERC filings, namely that OSHA communications may not be considered government orders for purposes of qualifying for the ERC.

The eligibility tests for the ERC hinge on employers identifying either a qualifying drop in gross receipts by comparing gross receipts by quarter in 2019 to the corresponding quarter in 2020 or 2021 or by identifying a full or partial suspension of operations related to government orders implemented to mitigate the spread of COVID-19. What constitutes a “government order” has been a hotly contested point, since as the IRS acknowledges, neither the CARES Act nor the Internal Revenue Code explicitly define the term “orders.” Absent such guidance, certain ERC consulting firms have taken the position that nationally-issued OSHA recommendations related to COVID constitute government orders, and thus that the impact of government orders qualifying employers for the ERC was extremely widespread.

GLAM 2023-007 provides insight into the IRS’ position on the definition of government orders and reiterates other IRS positions limiting the ability of employers to argue eligibility for ERC, namely:

• An order is a command or mandate delivered by a governmental official and valid orders for purposes of claiming the ERC must be issued from an appropriate governmental authority.
• Orders must limit commerce, travel or group meetings due to COVID-19 to be used in ERC claims.
• Recommendations, guidelines and suggestions (such as OSHA communications in 2020 and 2021 related to the ways employers could make workplaces safer and comply with preexisting OSHA standards during the pandemic) do not qualify as orders.
• Assumptions, vague statements and news articles are not government orders.
• Guidelines or nonbinding guidance without mandatory obligations with which employers must comply are not government orders.
• Valid government orders must be shown to have had a more than nominal impact on employer operations to substantiate a full or partial suspension of the business related to COVID-19.

Specifically in reference to OSHA standards as a potential argument for full or partial suspension of operations due to government orders, the IRS asserts the following:

• OSHA standards that existed prior to the COVID-19 pandemic do not qualify as a government order and OSHA’s guidance in response to COVID-19 did not place new obligations on employers.
• OSHA standards put in place to limit occupational exposure to infectious diseases do not qualify as government orders for the ERC, as they do not limit commerce, travel or group meetings.
• OSHA standards generally relate to modifications like requiring masks, providing sanitization supplies and encouraging social distancing and IRS Notice 2021-20 Q&A 18 previously indicated that modifications requiring customer behavior changes or requiring mask-wearing were not likely to result in a more than nominal impact on business operations and thus may not be relied upon as support for an ERC claim.
• In situations where OSHA recommendations were mandated by another governmental entity in a locale, employers may consider them in their ERC claim if the orders also had a more than nominal effect on employer’s trade or business.

The IRS has been actively examining ERC applications and has been vocal in warning taxpayers about aggressive tax positions, even adding the ERC to the “dirty dozen” list for 2023. However, the IRS continues to reiterate that the ERC is a legitimate program and that taxpayers with valid ERC claims that comply with the published tax law and guidance are welcome to file while the statute is open, typically April 15, 2024, for 2020 ERC claims and April 15, 2025, for 2021 ERC claims.