Partners Derek Adams and Laurent Campo are quoted in a Bloomberg Law article titled “Fraud-Laden Pandemic Credit Causes Headaches for Buyers in Deals," in which they discuss the impact the Employee Retention Credit (ERC) is having in the dealmaking space.

The issues can be significant for the M&A parties and range from faulty ERC claims, not yet processed ERC claims, valuation, insurance underwriting, and indemnification, all of which are discussed in the article and can contribute to slowing down the due diligence process and/or failing to reach a deal.

Campo, who practices in M&A, said “With this employee retention credit, I just know as soon as I see it, I’m extremely concerned.” M&A industry participants have all caught on to the extent of the ERC issues, and Campo added that even in the context of transactions with representation and warranty insurance “every single insurance company came back and said that their standard exclusion covers ERC.”

Faulty claims can be a significant liability for a prospective buyer, and Adams said in the article, “This should be part of the due diligence process for each deal that goes on right now. Because it’s not just paying back the money. That’s a risk, paying back the money, but it’s also interest potentially, which is currently 7 or 9% depending on how much the IRS determines the underpayment was.”

The Wall Street Journal article titled “The Pandemic-Era Tax Break Keeping the IRS Up at Night,” discusses how claims have soared and notes that as of March 31, 2022, the IRS had processed requests from more than 457,000 employers and paid out a total of $58.2 billion. By March 3, 2023, those figures had jumped to more than 866,000 and $152.6 billion.

Adams says, “The conclusion that everyone qualifies is not going to be supported at all.” Adams reports working with dozens of businesses that signed agreements with firms offering questionable tax-credit advice and that are now seeking to undo the damage.

In addition to Adams and Campo, the Potomac Law ERC team includes Tax Partner Susan Rogers, Tax Litigation Partner Richard “Jake” Gagnon, and Tax Partner Lisa Poole.

Read the Wall Street Journal article
Read the Bloomberg Law article

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