We’ve all heard and seen the barrage of promotions as aggressive marketing continues regarding the Employee Retention Credit – “Your business qualifies for up to $26,000 per employee” sound familiar? In light of this, the IRS has released multiple alerts to businesses to be careful of signs indicative of misleading claims involving the ERC, read here. While the credit is real, overly zealous promoters are misrepresenting and exaggerating who can qualify for the credit.
The IRS has stepped up audit and criminal investigation work involving these claims. Before you consider applying, you need to carefully review the official requirements for this limited program. Those who improperly claim the credit face follow-up action from the IRS.
IRS Commissioner Danny Werfel says, “The aggressive marketing of the Employee Retention Credit continues preying on innocent businesses and others. Aggressive promoters present wildly misleading claims about this credit. They can pocket handsome fees while leaving those claiming the credit at risk of having the claims denied or facing scenarios where they need to repay the credit.”
The Employee Retention Credit (ERC), sometimes called the Employee Retention Tax Credit (ERTC), is a legitimate tax credit. Many businesses legitimately apply for the pandemic-era credit. This is a very important credit for valid claims. The invalid claims, however, clog the system and create delays for everyone.
The IRS has been issuing warnings about aggressive ERC scams since last year, and it made the agency’s list this year of the “Dirty Dozen Tax Scams” people should watch out for. This is an ongoing priority area for the IRS. They remind taxpayers that anyone who improperly claims the ERC must pay it back, possibly with penalties and interest.
When properly claimed, the ERC is a refundable tax credit designed for businesses that continue paying employees while shut down due to the COVID-19 pandemic or that had a significant decline in gross receipts during the eligibility periods. The credit is for businesses and tax-exempt groups. It is not available to individuals.
Warning signs to watch out for include:
- Unsolicited calls or advertisements mentioning an “easy application process”.
- A promoter of company telling you they can determine ERC eligibility within minutes
- Large upfront fees to claim the credit
- Fees based on a percentage of the refund amount of ERC claimed. (This is a similar warning sign for average taxpayers, who should always avoid tax preparers who bases their fee on the size of the refund.)
- Claims from the promoter that the business receiving the solicitation qualifies before any discussion of that business’s tax situation.
- The IRS also sees wildly aggressive suggestions from marketers urging businesses to submit the claim because there is “nothing to lose”. Reality dictates those improperly receiving the credit could have to repay the credit – along with substantial interest and penalties.
Protect yourself by studying the eligibility requirements. These promoters may lie about eligibility credits. Also, those using these companies could be at risk of someone using the credit as a ploy to steal the taxpayer’s identity or take a cut of the taxpayer’s improperly claimed credit.
Additionally, promoters may fail to inform taxpayers that they need to reduce wage deductions claimed on their business’ federal income tax return by the amount of the Employee Retention Credit. This causes a domino effect of tax problems for the business.
In addition, many of these promoters don’t tell employers that they can’t claim the ERC on wages that were reported as payroll costs if they participated in the PPP program and obtained Paycheck Protection Program loan forgiveness.
Here are some simple steps you can take to protect yourself:
- Work with a trusted tax professional.
- Don’t apply unless you believe you are legitimately qualified for this credit.
To properly claim the ERC, you must meet very specific eligibility requirements. These are technical areas that require review. Applying may result in also filing an amended tax return. To be eligible, you must have:
- Sustained a full or partial suspension of operations due to orders from an appropriate governmental authority limiting commerce, travel or group meetings because of COVID-19 during 2020 or the first three quarters of 2021,
- Experienced a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021, or
- Qualified as a recovery startup business for the third or fourth quarters of 2021.
We have seen actual audits for ERC claims. As far as audits go, these are harsh, very harsh. If your business has received this funding, it’s a good idea to make sure all your necessary documents are in order.