The IRS has issued a notice advising taxpayers to be cautious of a particular scheme and to carefully consider their actions before proceeding. The IRS issued a “renewed warning” urging individuals to exercise caution regarding the employee retention credit guidelines in light of widespread promotions that encourage “ineligible persons” to apply for the credit.
Acting IRS Commissioner Doug O’Donnell cautioned that although the employee retention credit has been a valuable source of financial relief for numerous businesses, unscrupulous promoters persist in misleading individuals and businesses into believing that they are eligible to receive these credits. O’Donnell emphasized that those considering claiming the credit should thoroughly review the guidelines before doing so.
IRS is actively scrutinizing and conducting criminal probes into fraudulent claims
Furthermore, O’Donnell advised that if a tax professional expresses doubts regarding the validity of an Employee Retention Credit claim, individuals should heed their advice. He warned that the IRS is actively scrutinizing and conducting criminal probes into fraudulent claims, and thus individuals should exercise caution before making such claims.
The IRS cautioned that individuals who make an incorrect claim for the employee retention credit (ERC) may be obligated to return the credit and incur higher interest payments, as well as potential penalties.
The reason for the recent warning is due to the continued prevalence of third-party promoters advertising ERC schemes through radio and online channels. These groups often charge substantial upfront fees or fees that are contingent on the amount of the refund, prompting the need for increased vigilance among taxpayers.
The release stated that these promoters may neglect to inform taxpayers that the amount of the credit should be subtracted from the wage deductions claimed on the business’s federal income tax return. As per the IRS, the employee retention credit (ERC) is a tax credit that businesses can receive as a refund, provided they paid their employees during periods when COVID-19-related lockdowns and other restrictions caused a decline in gross receipts between March 13, 2020, and December 31, 2021. The IRS clarified that certain employers are eligible to claim the ERC on a tax return filed during the aforementioned period.
Employee retention credit (ERC)
The employee retention credit (ERC) was part of the CARES Act, a significant pandemic relief legislation enacted in early 2020. Congress established the ERC to incentivize businesses and employers to maintain their workforce during the months affected by the COVID-19 pandemic in 2020. The tax credit was first introduced as a 50 percent credit on eligible employee wages, but it was restricted to a maximum of $10,000 per worker, resulting in a maximum credit of $5,000 for wages paid during the applicable time frame. However, the credit has been modified since then.
For 2021, the credit was raised to 70 percent of qualified wages. Furthermore, Reuters noted that the wage limit per employee was raised from $10,000 per year to $10,000 per quarter. Eligible employers of any size who have paid qualified wages to their employees can claim the credit. Nonetheless, there are different rules that apply to employers with fewer than 100 workers and those with less than 500 employees for specific parts of 2020 and 2021.
The agency further noted on Tuesday that solely recovery startup businesses are qualified for the ERC in Q4 of 2021. Additionally, eligible employers cannot claim the ERC on wages utilized to claim specific other tax credits or reported as payroll costs in acquiring PPP (Paycheck Protection Program) loan forgiveness for any quarter.
Despite the IRS issuing warnings about these purported schemes since the previous year, there are still endeavors to claim the ERC during the 2020 filing period. Moreover, tax filing professionals and services have stated that they are facing pressure from individuals looking to claim credits improperly. According to the tax agency, the IRS stated that its internal Office of Professional Responsibility will release guidelines on how to address these schemes.
Last month, two trade groups wrote a letter (pdf) to the IRS and O’Donnell, requesting the agency to provide guidance on the credit. The groups stated that while the IRS had released various ERC filing alerts, they were aimed at employers, taxpayers, and employees, not tax professionals.