Why Is the IRS Cracking Down on the Employee Retention Credit (ERC)?
A tax incentive meant to help pandemic-impacted companies has become ground zero for an increasingly popular tax fraud: the ERC scam.
The Employee Retention Credit (ERC) was created early on in the COVID pandemic, as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which was signed into law in March 2020. The refundable tax credit was just one of several governmental aid measures, along with stimulus checks, the Paycheck Protection Program (PPP) and additional Economic Injury Disaster Loan (EIDL) funding.
Since then, however, a growing swath of third parties have aggressively advertised services promising to help business owners claim the ERC. That help comes at a cost of course, and only after paying that cost do many of those businesses discover that they were not, in fact, eligible for the credit. As a result, the IRS has heightened its scrutiny of the Employee Retention Credit.
Let’s dive into this flourishing ERC scam so you can spot the signs and avoid being swindled.
ERC Eligibility
One of the first things you can do to avoid falling prey to the ERC scam is to understand how eligibility works.
Per the IRS: The credit is available to certain employers (both businesses and tax-exempt organizations) that paid qualified wages to some or all employees after March 12, 2020, and before Jan. 1, 2022. To qualify, your business generally needs to have paid qualified wages, and it must meet one of three criteria:
- It was shut down by government order due to COVID-19 during 2020 or the first three quarters of 2021; or
- Experienced a required decline in gross receipts during 2020 or the first three quarters of 2021; or
- Qualified as a recovery startup business for the third or fourth quarters of 2021
The Scam
Since fall 2022, the IRS has been warning U.S. employers about increasing marketing of services advising companies to “apply” for money by claiming the Employee Retention Credit. The ads, the IRS says, “are all over radio, TV and social media,” though it can get even more personal: some scammers deployed texts, emails, phone calls, even official-looking letters purporting to be from the government.
The problem? The only way you can claim the ERC is on a federal employment tax return. But fraudsters insist they can help businesses claim the credit — for a fee. Many of the companies that end up claiming it aren’t eligible, however, and in turn they might be forced to pay penalties and interest.
“Businesses need to think twice before filing a claim for these credits,” IRS Commissioner Danny Werfel said in a March release. “While the credit has provided a financial lifeline to millions of businesses, there are promoters misleading people and businesses into thinking they can claim these credits.”
The ERC scam has become so pervasive that this April, the IRS added it to its “Dirty Dozen” list of popular tax scams. And — importantly for businesses thinking about applying for the ERC — the IRS has heightened its scrutiny of this credit.
In other words: Now, more than ever, the IRS is equipped to sniff out fraudulent ERC claims.
Red Flags to Watch For
The IRS has a laundry list of red flags to watch for that can indicate someone’s trying to perpetrate the ERC scam. Among them:
- “Unsolicited ads, calls, emails or texts from someone you don’t know.”
- “Statements that the promoter or company can determine your ERC eligibility within minutes.”
- “Large upfront fees to claim the credit.”
- “Fees based on a percentage of the refund amount of Employee Retention Credit claimed – you should always avoid a tax preparer basing their fee on the amount of the refund.”
- “Statements from the promoter that you qualify for the credit before any discussion about your tax situation.”
- “Statements from the promoter urging you submit the claim because there is nothing to lose.”
The Employee Retention Credit is a legitimate tax credit that your small business might qualify for. But if you want to know for sure, your best bet is to talk to professional tax experts. That’s because true tax pros are equipped to help you maximize your tax savings — but won’t jeopardize your good standing with the IRS.
McManamon & Co. offers a wide number of tax services to small and midsize businesses, and we can help you determine your eligibility for tax deductions and credits, including (but certainly not limited to) the ERC.
Reach out and get started today! Just call 440.892.8900 or contact us online.
Tags: fraud, McManamon, McManamon & Co., small business taxes, tax scams, taxes | Posted in Fraud, McManamon & Co., taxes