The Employee Retention Credit (ERC) is a refundable payroll tax credit that was introduced during the COVID-19 pandemic to incentivize employers to maintain employment levels during a government shutdown or period with a significant decline in financial performance. For most businesses, the ERC may be available for wages paid after March 12, 2020 and before Oct. 1, 2021. Qualifying for the credit can be quite complicated and nuanced; the eligibility requirements, applicable time periods, dollar limitations and other factors have changed several times since the credit’s inception.
The IRS has repeatedly sounded the alarm on ERC scams, including identifying ERC scams as the No. 1 worst tax scam on its 2023 Dirty Dozen list. There is an entire cottage industry of credit promoters that has formed to aggressively promote the ERC and cause businesses to claim credits to which they are not entitled.
WHAT TO LOOK FOR
ERC issues have become so widespread that the IRS has addressed them in a recent FAQ intended to caution taxpayers about potential scams. The IRS warns that scammers frequently deceive their targets by offering large, unsubstantiated credit calculations and omitting key details about eligibility. These scammers will then charge upfront fees based on a percentage of the ERC number generated. ERC scammers lie about eligibility requirements for a business and are nowhere to be found once the business gets audited or needs to return any portion of the credit refund (usually with interest and penalties).
HOW TO PROTECT YOUR BUSINESS
The IRS encourages taxpayers to avoid being misled into filing false ERC claims by following a few simple guidelines:
- Only work with trusted tax professionals. Do not respond to aggressive marketing campaigns that oversimplify the ERC.
- Request detailed workpapers that plainly present and explain ERC computations and qualifications determined on behalf of a taxpayer.
- Ensure that any governmental order that substantiates full or partial suspension of business operations clearly applies to the business.
- Make sure that the eligibility requirements to claim the ERC are fully understood and that this business legitimately believes they qualify for the credit.
In a separate release, the IRS commissioner indicated that they continue to see more questionable ERC claims being filed following the increase in misleading marketing. The IRS plans to intensify scrutiny on ERC claims and even initiate criminal investigations on both unscrupulous ERC promoters and businesses filing questionable claims.
If you have any questions about the ERC, its impact on your business or even the legitimacy of claims you may have previously filed with an untested ERC service provider, please contact the Tax Services Team at GHJ.