The Employee Retention Credit (ERC) was created as an incentive to help business owners retain and pay their employees during the uncertainty surrounding the COVID-19 pandemic. The credit qualifications and underlying guidance were urgently issued by the IRS so taxpayers could obtain the funds for the credit and keep their businesses afloat.
However, hindsight is 20/20. Over the past three years, the ERC has been rife with abuse and the IRS has been unable to keep up with review and approval of legitimate credit filings. Numerous businesses have been targeted with aggressive marketing, mail solicitations, and online promotions claiming they are eligible for the ERC. However, ERC eligibility is complex and not as straightforward as ERC promoters make it seem.
As a result, ERC scams made their way to the top of the “Dirty Dozen,” which is an annual list of common scams taxpayers may encounter. On May 25, 2023 the IRS issued its seventh ERC-related alert since October 2022, reminding businesses to watch out for misleading claims. The May alert listed important tips that taxpayers should be wary of involving the ERC.
Here are nine warning signs of aggressive ERC marketing:
- Unsolicited calls or advertisements mentioning an "easy application process"
- Statements that the promoter can determine ERC eligibility within minutes
- Large upfront fees to claim the credit
- Fees based on a percentage of the refund amount of the credit claimed
- Aggressive claims that the business receiving the solicitation qualifies before any discussion of its tax situation
- Aggressive suggestions urging businesses to submit the claim because there is nothing to lose. In fact, ineligible businesses that apply for the ERC have much to lose, including paying back the credit plus interest and penalties
- Leaving out key details (for example, eligibility requirements and the computation of the credit are not explained)
- Paycheck Protection Program participation
- Many promoters don't tell employers that they can't claim the ERC on wages that were reported as payroll costs if they obtained Paycheck Protection Program loan forgiveness. The IRS does not allow a double dipping of the credit.
- Audit Documentation & Support should the IRS initiate an audit of the ERC
- Most ERC promoters established business in 2021. Should there be an audit, the ERC promoter will most likely not have proper documentation and support, and can potentially be out of business by the time the IRS initiates an audit within the five year statute of limitation.
The ERC is a legitimate tax credit for which many businesses have applied and received. However, there are many taxpayers that are still waiting on their credit as a result of the illegitimate claims that have been made.
As a result, refunds have been delayed and the IRS has trained auditors examining ERC claims posing the greatest risk. The IRS Criminal Investigation division is working to identify ERC-related fraud and promoters of fraudulent claims. As of April 30, the IRS had initiated 122 criminal investigations involving over $1.2 billion of potentially fraudulent ERCs in tax years 2020 and 2021.
The IRS has stated that the best way for a business to protect itself from an IRS audit of the ERC is to work with a tax professional rather than a promoter.
If you have been contacted by an ERC promoter, the dollar amount of the credit may sound enticing. However, before making any type of commitment, it would be in the company’s best interest to confirm the legitimacy of the promoter and its ERC qualifications.
If you have any questions or would like assistance as you navigate the ERC process, please contact any member of our Tax Strategies team.
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