In today’s media landscape, both the airwaves and the Internet are saturated with advertisements asserting that businesses are overlooking the profitable Employee Retention Tax Credit (ERC). Although certain employers do qualify under specific conditions, the IRS persists in advising businesses to be wary of scams orchestrated by third parties in connection with this credit.
While rightfully claiming entitled credits is legitimate, it’s crucial to acknowledge that improperly pursuing the ERC could lead to confrontations with the IRS and potentially trigger financial difficulties. To minimize your risks, it’s essential to grasp the following key points.
IRS persists in advising businesses to be wary of scams
The ERC stands as a refundable tax credit designed for businesses that fulfill one of two conditions: 1) Continued paying employees during pandemic-related shutdowns in 2020 and 2021, or 2) experienced notable declines in gross receipts between March 13, 2020, and December 31, 2021. Eligible employers could potentially receive credits of up to $26,000 per retained employee. It’s worth noting that the credit might still be accessible through an adjusted tax return.
Nevertheless, the prerequisites are stringent. Specifically, you must have:
- Encountered a complete or partial suspension of operations due to governmental mandates that restricted commerce, travel, or group gatherings in response to COVID-19 during 2020 or the initial three quarters of 2021.
- Faced a considerable reduction in gross receipts during 2020 or the opening three 2- quarters of 2021.
- Qualified as a recuperating startup business, which has the ability to claim the credit for a maximum of $50,000 per quarter without demonstrating suspended operations or reduced receipts, exclusively for the third or fourth quarters of 2021. These eligible recovery startups are those that commenced operations after February 15, 2020, and registered annual gross receipts of $1 million or less for the three tax years preceding the applicable quarter for ERC claim.
Furthermore, a business cannot assert the ERC on wages previously categorized as payroll costs during the application for Paycheck Protection Program (PPP) loan forgiveness or when claiming specific other tax credits. Additionally, a business must offset wage deductions declared in its federal income tax return by the credit amount.
Proliferation of Deceptive Schemes
The alluring potential of the ERC, coupled with the extended window for filing claims via amended returns until April 15, 2025, has given rise to a burgeoning industry of deceitful promoters who promise to assist businesses in securing the credit. These fraudsters peddle misinformation and exaggerated assurances to attract unsuspecting clients, ultimately pocketing exorbitant upfront charges reaching into the thousands of dollars, or even commissions as high as 25% of the refunded amount.
The IRS has labeled the rampant misleading marketing surrounding the credit as “astonishing.” For instance, recent guidance from the tax agency clarified that, contrary to the counsel of certain promoters, disruptions in the supply chain generally do not qualify an employer for the credit unless those disruptions stem from a government directive. Mere suspension of operations due to disruptions is insufficient—the credit applies exclusively if the employer’s suspension of operations occurred because of a government-mandated suspension by the supplier.
ERC fraud has escalated to the extent that the IRS has incorporated it into its annual roster of the “Dirty Dozen” worst tax scams in the nation. In a Utah case, the U.S. Department of Justice has charged two promoters operating under the name “1099 Tax Pros” with engaging in a fraudulent tax scheme. They prepared and submitted over 1,000 forms to the IRS, claiming over $11 million in fabricated ERCs and COVID-related sick and family leave wage credits for their clients.
Exploiting the widespread bewilderment and ambiguity surrounding the ERC, these fraudsters have thrived. A recent congressional hearing revealed that certain issues could be attributed to the paper-based application process designed for the credit. This has led to an accumulation of nearly 500,000 pending claims, out of more than 2.5 million submitted claims.
Although the progress of the IRS in tackling this backlog remains unclear, the agency has declared a new phase of heightened scrutiny on ERC claims. It is amplifying its compliance efforts and implementing additional protocols to counter fraud within the program. The IRS has already escalated its audit and criminal investigation activities concerning ERC claims, targeting both promoters and businesses that file dubious claims.
If you’ve fallen into this trap and find yourself among these affected businesses, you could potentially be liable to repay the credit, along with fines and interest, in addition to the fees paid to the promoter. This could severely impact your cash flow.
Even if you meet the eligibility criteria for the credit, complications could arise if you fail to properly adjust your wage deductions or if you claim the credit on wages also used to assert other credits. As the IRS has underscored, promoters might omit vital details, unleashing a chain reaction of tax predicaments for unwitting businesses.
Furthermore, entrusting your business and tax documentation to an unscrupulous promoter could expose you to the risk of identity theft
Indicators of Suspicion to Stay Alert For
The IRS has pinpointed several telltale signs of deceitful promoters, which encompass:
- Unsolicited communications via phone calls, text messages, direct mail, or advertisements promoting an “effortless application process” or a concise eligibility checklist (in reality, the regulations for eligibility and computation of credit amounts are notably intricate).
- Assertions that the promoter can determine your eligibility for the ERC within minutes.
- Demanding significant upfront charges.
- Fees structured based on a percentage of the claimed refund amount.
- Preparers who decline to sign the amended tax return submitted to claim the credit refund.
- Forceful affirmations from the promoter regarding your qualification before assessing your individual tax circumstances (it’s important to note that the credit isn’t accessible to all employers).
- Refusal to furnish comprehensive documentation outlining the methodology used to calculate your credit.
The IRS additionally cautions that certain ERC “operations” are dispatching counterfeit letters impersonating non-existent government entities such as the “Department of Employee Retention Credit.” These letters are meticulously crafted to resemble official IRS or government correspondences and typically incorporate urgent language pressuring immediate action.
Safeguarding Yourself
Implementing a few straightforward measures can significantly diminish your vulnerability to fraudulent schemes. To begin with, if you believe you might qualify for the credit, collaborate with a dependable professional—preferably one who is not actively seeking ERC-related work. Individuals aggressively promoting the credit (and sometimes exclusively the credit) often prioritize their own financial gains and might not have your best interests at heart.
It’s also advisable to request a comprehensive worksheet that outlines your eligibility for the credit. This worksheet should elucidate the calculations that lead to the credit amount.
If you’re asserting that your business was suspended due to a government directive, it’s imperative to possess authentic documentation of the order. Generic documents about government orders from third parties should be treated skeptically. Instead, endeavor to secure a copy of the actual government order and scrutinize it to ascertain its relevance to your business.
While no taxpayer desires to miss out on potential funds from the IRS, it’s essential to approach situations with caution when they appear overly favorable. If you suspect that your business could meet the criteria for the ERC, seeking guidance from your ORBA advisor can prove invaluable. They can assist in confirming your eligibility, calculating the credit, and submitting your refund claim. Moreover, they can provide insights on the appropriate course of action if you’ve mistakenly claimed the ERC.