On May 25, 2023, the IRS issued another alert to businesses about an aggressive marketing campaign involving the Employee Retention Credit (ERC).
The IRS and tax professionals continue to see aggressive broadcast advertising, direct mail solicitations, and online promotions involving the ERC. While the credit is real, aggressive promoters are misrepresenting and exaggerating who can qualify for the credits.
The IRS has stepped up audit and criminal investigation work involving these claims. Businesses, tax-exempt organizations, and others considering applying for this credit need to carefully review the official requirements for this limited program before applying. Those who improperly claim the credit face follow-up action from the IRS.
The ERC, also known as the Employee Retention Tax Credit (ERTC), is a legitimate tax credit and many businesses legally apply for the pandemic-era credit. The IRS has added staff to handle ERC claims, which are time-consuming to process because they involve amended tax returns.
IRS Commissioner Danny Werfel said, “This continual barrage of marketing by advertisers means many invalid claims are coming into the IRS, which also means it takes our hard-working employees longer to get to the legitimate Employee Retention Credits. The IRS understands the importance of these credits, and we appreciate the patience of businesses and tax professionals as we continue to work hard to get valid claims processed as quickly as possible while also protecting against fraud.”
Since last year, the IRS has been issuing warnings about aggressive ERC scams and it made the agency’s list this year of the Dirty Dozen tax scams.
This is an ongoing priority area in many ways, and the IRS continues to increase compliance work involving ERC. The IRS has trained auditors examining ERC claims posing the greatest risk, and the IRS Criminal Investigation division is working to identify fraud and promoters of fraudulent claims.
The IRS reminds anyone who improperly claims the ERC that they must pay it back, possibly with penalties and interest. A business or tax-exempt group could find itself in a much worse cash position if it has to pay back the credit than if the credit was never claimed in the first place.
When properly claimed, the ERC is a refundable tax credit designed for businesses that continued paying employees while shut down due to the COVID-19 pandemic or had a significant decline in gross receipts during the eligibility periods. The credit is not available to individuals.
Properly Claiming the ERC
There are specific eligibility requirements for claiming the ERC. These are technical areas that require review. They can claim the ERC on an original or amended employment tax return for qualified wages paid between March 13, 2020, and December 31, 2021. However, to be eligible, employers must have:
- Sustained a full or partial suspension of operations due to orders from an appropriate governmental authority limiting commerce, travel or group meetings because of COVID-19 during 2020 or the first three quarters of 2021,
- Experienced a significant decline in gross receipts during 2020 or 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.
Warning Signs of Aggressive ERC Marketing
Some warning signs people should watch out for include:
- Unsolicited calls or advertisements mentioning an “easy application process.”
- Statements that the promoter or company can determine ERC eligibility within minutes.
- Large upfront fees to claim the credit.
- Fees based on a percentage of the refund amount of ERC claimed.
- Claims from the promoter that the business receiving the solicitation qualifies before any discussion of the group’s tax situation.
- Suggestions from marketers urging businesses to submit the claim because there is nothing to lose.
These promoters may lie about eligibility requirements. In addition, those using these companies could be at risk of someone using the credit as a ploy to steal the taxpayer’s identity or take a cut of the taxpayer’s improperly claimed credit.
How the Promoters Entice Victims
The IRS continues to see a variety of ways that promoters can entice businesses, tax-exempt groups, and others into applying for the credit.
Aggressive marketing. This can be seen in countless places, including radio, television, and online, as well as phone calls and text messages.
Direct mail. Some ERC mills are sending fake letters to taxpayers from the non-existent groups like the “Department of Employee Retention Credit.” These letters can look like official IRS correspondence or official government mailing with language urging immediate action.
Leaving out key details. Third-party ERC promoters do not accurately explain eligibility requirements or how the credit is computed. They may make broad arguments suggesting that all employers are eligible without evaluating an employer’s individual circumstances. Examples include:
- Only recovery startup businesses are eligible for the ERC in the fourth quarter of 2021, but promoters fail to explain this limit.
- Promoters may not inform taxpayers that they need to reduce wage deductions claimed on their business’ federal income tax return by the amount of the ERC.
Payroll Protection Program participation. Most promoters do not tell employers that they cannot claim the ERC on wages that were reported as payroll costs if they obtained Paycheck Protection Program loan forgiveness.
How Businesses Can Protect Themselves
The IRS reminded businesses, tax-exempt groups and others being approached by these promoters that there are simple steps that can be taken to protect themselves from making an improper ERC.
Work with a trusted tax professional. Eligible employers who need help claiming the credit should work with a trusted tax professional; the IRS urges people not to rely on the advice of those soliciting these credits. Promoters have a vested interest in making money.
Do not apply unless you believe you are legitimately qualified. Details are available on IRS.gov and a tax professional can provide advice.
To report ERC abuse, submit Form 14242, Report Suspected Abusive Tax Promotions or Preparers. People should mail or fax a completed Form 14242, Report Suspected Abusive Tax Promotions or Preparers, and any supporting materials to the IRS Lead Development Center in the Office of Promoter Investigations.
Internal Revenue Service Lead Development Center
24000 Avila Road
Laguna Niguel, California 92677-3405