How to Protect Your Business from Employee Retention Credit Scams
For businesses, the Employee Retention Credit (ERC) might sound like a big benefit. But beware of big scams by so-called “ERC Mills” trying to mislead you into thinking you are eligible for large sums of money — when your business might not even qualify in the first place.
A credit that was intended by the federal government to incentivize businesses to keep their workers employed during the height of the COVID-19 pandemic has led to a scam that could leave some businesses in tax trouble.
Under the CARES Act of 2020, the federal government created the ERC program to provide a tax credit for businesses that kept people employed between March 13, 2020 and December 31, 2021.
The ERC is a refundable federal payroll tax credit meant to help businesses that continued to pay their employees during the pandemic shutdown or that experienced significant declines in gross receipts during that time. The idea was to give businesses that met certain criteria additional cash flow at a difficult time so they could maintain payroll.
So, needless to say, businesses worked with their accountants and tax experts to determine whether they qualified for the ERC and fill out all relevant paperwork to apply for the credit.
Still, in mid-2023, as many businesses that qualify have already applied, ERC mills are rising and businesses need to pay attention to protect themselves.
What Businesses Are Actually Eligible for the Employee Retention Credit?
To be eligible for the ERC, a business must have:
- Experienced a full or partial suspension of operations due to orders 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 a significant decline in gross receipts during 2020or 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.
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.
Eligible businesses can claim the ERC on an original or amended employment tax return for a period within those dates.
What Are the ERC Mills Doing to Scam Businesses?
What’s happening with the ERC is strikingly similar to other tax scams.
Fraudsters are creating ERC mills, preying on wishful business owners all over the map, and conning them into believing that they qualify for the ERC — without even checking their criteria. Or they are submitting requests on behalf of businesses with incorrect calculations of the credit that are dramatically inflated compared to what the businesses are owed.
In some cases, the mill is taking upfront fees from businesses to complete the fraudulent paperwork, for money the businesses will never actually receive.
They might also charge a fee that is dependent on the amount of the refund – known as a contingency fee — but they generally don’t tell the business that wage deductions claimed on the business income tax return must be reduced by the amount of the credit.
Look for These Warning Signs of Fraudulent ERC Mills
For starters, if you see an ad on social media or anywhere telling you that you might qualify for large credits from the IRS called Employee Retention Credits or ERC, don’t click.
Here are some other warning signs that you might be dealing with a fraudulent ERC mill:
- Big promises: If the ads or marketing materials say that you are “guaranteed” to receive the ERC or “instantly approved,” or something else absolute in nature, do not proceed.
- Large credits and large fees: Assurance of large credits and/or over-the-top fees are a telltale sign that you’re dealing with an ERC mill. If it’s too good to be true, it probably isn’t true at all.
- Fake forms that look like IRS forms: ERC mills have started to lure unaware business owners by marketing to them using a form that looks like a 1099, but isn’t real. They create these forms with the business owner’s name and a large dollar amount, erroneously claiming they are due a large credit.
- They don’t evaluate whether your business qualifies for the ERC: Unless a professional looks at your business and clearly determines that you qualify for the ERC, do not allow them to file for any credits on your behalf.
If You’ve Been Scammed, Talk to a Qualified Tax Lawyer
For businesses that believe they qualify for the ERC and haven’t filed a claim, work with a licensed tax professional to confirm your eligibility.
If you’ve been scammed by an ERC mill, the biggest problem is that you might get stuck repaying the credit, plus penalties and interest.
It’s not going to be easy to sue these mills when businesses start to get audited over the issue. By then, they are likely to get shutdown by the IRS.
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 Whatley now.