“Save up to $26,000 per employee.”

“Did your accountant say you’re not eligible? It’s worth a second opinion.”

“Apply now before funds run out.”

That is the type of advertising that’s been driving hundreds of thousands of small business owners to apply for the Employee Retention Credit (ERC) in recent months.

But due to the surge of questionable filings, the IRS has announced a temporary moratorium on processing new claims.

The agency is warning business owners to watch out for fraud from aggressive marketers pushing them to make a claim. Meanwhile, the government is working on withdrawal and settlement options for business owners who were misled by fraudulent ERC promotions.

What’s the ERC Scam?

It’s a common pattern with government tax incentives. The government creates a program and then companies pop up claiming they specialize in it, even though it’s new to everyone.

That’s what’s happening now, as promoters have been working overtime to convince business owners they’re eligible for this tax credit, designed as a pandemic relief program. These so called “ERC mills” often make inaccurate claims about the amount of money that employers can collect.

ERC “tax consultants” typically charge an upfront fee for claim preparation, and they may take a sizeable commission on any credit the business receives. They overpromise results, the business pays a fee, and the IRS rejects the claim. Rinse and repeat.

Unfortunately, the problem goes beyond a flood of ineligible applications. Some business owners received credits, which they may have to pay back, while others are facing different problems:

• Withholding information: ERC mills may not 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. That can trigger a domino effect of tax problems. In addition, many of these marketers don’t tell employers that they can’t claim the ERC on wages that were already reported as payroll costs to obtain Paycheck Protection Program (PPP) loan forgiveness.
• Identity theft: By posing as tax advisors, bad actors can collect a wealth of personal information from employers, such as Social Security and bank account numbers.
• Fraudulent claims: Some ERC promoters will even falsify documents to drive up their success rates and commissions. They may alter payroll records, creating fake employees or exaggerated wages, to generate a higher credit.

The end result: The ERC mill walks away with lucrative fees while many business owners find themselves in tax trouble — owing repayments, penalties, and interest. (Yes, the IRS will go after the promotors who filed these claims, but ultimately, the taxpayer is still responsible, even if an ERC mill was involved.)

According to the IRS, tax professionals are reporting that roughly 95% of the recent ERC claims they’ve reviewed have been ineligible. That comes as ERC mills promise “risk free” applications, pushing people to apply regardless of the rules or potential repercussions.

Here in our own office, we’re seeing clients with inflated six and seven figure refund estimates — promises that will never come to fruition under IRS scrutiny.

IRS Taking Action to Protect Businesses

The IRS has stated that it is implementing the moratorium to protect taxpayers from scams and to ensure that the ERC is only claimed by eligible employers. The agency is also working to develop new protections and safeguards to prevent bad claims from being filed.

“The IRS is increasingly alarmed about honest small business owners being scammed by unscrupulous actors, and we could no longer tolerate growing evidence of questionable claims pouring in,” said IRS Commissioner Danny Werfel. “The continued aggressive marketing of these schemes is harming well-meaning businesses and delaying the payment of legitimate claims.”

What Should You Do if You’ve Already Filed

If you applied for an ERC and are unsure your business legitimately qualified, act now to review your situation. Work with a trusted tax professional who will evaluate your ERC claim, and your relevant pandemic-era operations, to determine whether or not you meet the ERC requirements.

Get a second look from an experienced tax attorney to be sure that:

• You correctly took any PPP funds into account.
• You excluded family members from employee calculations.
• Your amended return accurately matches your payroll and revenue data.

If it turns out that you did not qualify, the IRS is offering the following paths to resolution:

• Withdraw your claim: You will be able to withdraw your amended return that included your ERC claim as long as your claim has not been processed and paid — even if it’s currently under audit. Requesting a withdrawal means you would be asking the IRS not to process your entire amended return that included your ERC claim. The IRS will issue details on how to request a withdrawal soon. However, even if you do withdraw your claim, the IRS made clear that you might not get escape criminal action: “Those who have willfully filed fraudulent claims or conspired to do so should be aware, however, that withdrawing a fraudulent claim will not exempt them from potential criminal investigation and prosecution.”
• Wait for the ERC settlement program: If you received a tax credit that you now believe to be in error, stay tuned for additional details on an IRS settlement program coming this fall. The IRS is developing a settlement program that might allow businesses to reduce or avoid penalties and future compliance actions.

What Does it Take to Qualify for the Employee Retention Credit?

 As the IRS itself states, the ERC is “an incredibly complex credit.” Employers can claim the ERC on an original or amended employment tax return for qualified wages paid between March 13, 2020, and Dec. 31, 2021. However, to be eligible for the ERC, a business must have:

• Experienced a full or partial suspension of operations due toorders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19 during 2020 or the first three quarters of 2021,
• Experienced asignificant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021, or
• Qualified as arecovery startup business for the third or fourth quarters of 2021.

Arguably, the first bullet above is subjective. For example, a lot of ERC mills told businesses they qualify for the ERC based on general supply chain distributions. The IRS later clarified that it viewed supply chain issues as more narrow in scope, but some ERC mills continued to sell their services on ERC under a general supply chain disruption theory of qualification.

In reality, you need to show that your business was under a legal order to stop, or limit, operations.

Also important: Any business applying for the ERC may not claim the ERC on wages that were reported as payroll costs in obtaining PPP loan forgiveness or for wages used to claim certain other tax credits.

For businesses that believe they qualify for the ERC and haven’t yet filed a claim, work with a licensed tax professional to confirm your eligibility. The current moratorium is only temporary and is not meant to stop qualified businesses from applying.

If you own a business and you’re concerned you’ve been scammed or you have received an IRS audit letter, contact the Law Offices of Alyssa Maloof Whatley now. We can evaluate your eligibility and help you withdraw your claim, apply for settlement relief or represent you in an IRS audit.