For the Defense - Vol. 7, Issue 2 - 28

of hours of service performed by employees in the same
calendar quarter in 2019).15
The ability to carve up a business into different " portions "
based on employee hours, and not just revenue, gives
employers (and their tax advisors) considerable flexibility
in evaluating whether, as a result of a government order,
more than a nominal portion of a business experienced
more than nominal restrictions on its operations.
Comparability of Tele-Work
If an employer's workplace is closed by a government
order, but the employer can continue operations
comparable to its operations prior to the closure, including
by requiring its employees to telework, the employer's
operations are not considered to have been fully or
partially suspended because of a government order.16
To determine whether an employer can continue its
operations in a comparable manner, one must consider
the: a) employer's telework capabilities; b) portability
of employees' work; c) need for presence in employer's
physical workspace; and d) challenges associated with
transitioning to telework operations.17
The IRS has
provided three examples to help illustrate the application
of these factors.
Example 1 disallows the employee retention credit to
a software development company where, prior to the
pandemic, all of the employees previously teleworked at
least once or twice a week. Following the government
order, the software development company made
teleworking mandatory. In this hypothetical, the IRS
concluded that the software development company's
business operations were not fully or partially suspended
because the employer was able to continue is business
operations in a comparable manner.18
Example 2 allows the credit for a physical therapy
practice because of their inability to service certain
clients who needed access to equipment at the office.
Unlike the software development company, none of the
physical therapy practice's employees teleworked prior to
the pandemic. After the government order, the practice
moved to an online format and could serve some of its
clients remotely. However, because the employees could
not access specific equipment or tools in the office, some
patients could not be served remotely. The IRS found
that the physical therapy practice's business operations
were partially suspended. It reasoned that the practice's
workplace, including access to the physical therapy
equipment, were central to it business operations, so it
could not continue in a comparable manner.19
Example 3 concerns a scientific research company
that employed both laboratory-based researchers and
computer-modeling researchers. Employees engaged in
the laboratory-based research were unable to work while
their workplace was closed, while the employees engaged
28 For The Defense l Vol. 7, Issue 2
Employers claim the employee retention credit by filing
amended employment tax returns (Form 941) for each of
the quarters for which they are eligible. Employers still
have time to claim the credit as they generally have three
years to file amended employment tax returns.21
The IRS imposes strict documentations requirements on
employers claiming the credit.22
The IRS may impose a 20%
Due to the
accuracy-related penalty if it determines that an employer
negligently determined that it was eligible.23
number of anticipated claims, Congress extended the
statute of limitations to five years.24
Conclusion: Carefully Consider the Credit
In my experience, most certified public accountants
are comfortable applying the significant decline in gross
receipts test. For good reason, they are less comfortable
with the government orders and impacts test, unless the
employer totally ceased operations.
A cottage industry has sprung up to help employers
decode the government orders and impacts test. Many
of these advisors charge a contingency fee of 15% to
20% of the credit amount, with the fees approaching
or even exceeding $1M as a result of the large credit
amounts available to some employers. Some contingent
fee-based advisors even demand their fee before the
returns are processed. The ability of these firms to
charge a contingency fee is questionable given the
rules concerning practice before the IRS.25
Generally,
practitioners appearing before the IRS are not permitted
to charge a contingency on amended tax returns except
in very limited circumstances.26
The American Institute
for Certified Public Accountants only permits its member
in computer modeling were able to continue working.
The IRS concluded that the employer experienced a
partial suspension and thus was eligible because the
laboratory-based research operations could not continue
in a comparable manner.20
In this last hypothetical,
depending on the number of its employees, the scientific
research company may still be eligible for a credit for all
employees, even those employees engaged in computer
modeling who were able to continue working.
The IRS guidance is silent on how the government
effects test should be applied to business models that rely
heavily on office support staff, like law firms. The business
operations of most law firms are closer to the physical
therapy practice and the scientific research company cited
in the IRS Notice 2021-20-both of whom were deemed
eligible for the credit-than to the software development
company. Service-based employees that rely heavily on
office support staff should carefully evaluate whether
their entire firm, especially their administrative staff,
could comparably work in a remote fashion during the
pandemic.
Businesses Receive the Credit by Filing Amended Forms 941
For the Defense - Vol. 7, Issue 2

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