In response to the surge of questionable claims, the IRS announced on Sept. 14, a moratorium on processing any new Employee Retention Credit (ERC) claims until at least the end of this year. This action is intended to protect honest small business owners and give the IRS time to review existing ERC claims for compliance. See TAS Tax Tip: Waiting on an Employee Retention Credit Refund? for more information.
Aggressive marketers and scammers have their targets set on the ERC. You may have seen television commercials or received emails promising employers payouts of this pandemic-related refundable tax credit. Remember, with schemes like this, employers should be cautious of advertisements and direct solicitations promising tax savings that sound too good to be true.
These schemes often come from third-party advisers who urge employers to claim the ERC based on inaccurate information related to eligibility for and computation of the credit. The IRS is stepping up enforcement action involving these ERC claims, and people considering filing for these claims should be aware they are ultimately responsible for the accuracy of the information on their tax return.
What is The Employee Retention Credit?
The ERC is a refundable tax credit for businesses and tax-exempt organizations which continued paying employees while shutdown due to the COVID-19 pandemic or had significant declines in gross receipts from March 13, 2020, through December 31, 2021. The ERC is not available to individuals. Eligible taxpayers can claim the ERC on an original or amended employment tax return for a period within those dates.
Although the eligibility requirements are different depending on the time period for which the ERC is being claimed, in general, employers must meet one the following conditions:
They sustained 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 calendar quarters of 2021;
The business experienced a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three calendar quarters of 2021; or
The employer qualified as a recovery startup business for the third or fourth calendar quarters of 2021.
Eligible employers must have paid qualified wages to claim the credit but cannot claim the credit on wages reported as payroll costs to get Paycheck Protection Program loan forgiveness, or that they used to claim certain other tax credits.
Reminder: If you file Form 941-X to claim the Employee Retention Credit, you must reduce your deduction for wages by the amount of the credit for that same tax period. Therefore, you may need to amend your income tax return (for example, Forms 1040, 1065, 1120, etc.) to reflect that reduced deduction.
Warning Sign of Possible ERC Schemes
Promoters continue to aggressively promote ERC schemes, especially on the radio, online and on social media. The ERC is a complex credit that requires careful review before applying, so be wary of:
- Unsolicited ads, calls, emails, or texts from someone you don’t know.
- Statements that the promoter or company can determine your ERC eligibility within minutes.
- Large upfront fees to claim the credit.
- Fees based on a percentage of the refund amount of ERC claimed – you should always avoid a tax return preparer basing their fee on the amount of the refund.
- Statements from the promoter that you qualify for the credit before any discussion about your tax situation.
- Statements from the promoter urging you to submit the claim because there is nothing to lose. In reality, those improperly receiving the credit could have to repay the credit – along with substantial interest and penalties.
In reality, those improperly receiving the credit could have to repay the credit – along with substantial interest and penalties. These promoters may lie about eligibility requirements to line their pockets. Remember, if the IRS determines you filed an improper ERC claim, you will be required to return the claim amount along with interest and penalties. And in some situations, you may be subject to potential criminal investigation and prosecution.
New Approach from Scammers
Marketers and scammers have already revised their ERC pitches following the Sept. 14 moratorium announcement. Some are pushing employers who submit an ERC claim into agreeing to costly up-front loans in anticipation of a refund. The IRS urges employers to avoid these loans and also learn the warning signs of ERC scams.
What If I Filed an ERC Claim For Which I Don’t Qualify?
If you determined that you filed an ERC claim for which you don’t qualify, you should take action as soon as possible, as you are responsible for everything on your tax return, even when someone else prepares it. Correcting your return before being contacted by the IRS may help avoid some types of penalties.
If you are eligible to claim some ERC but claimed more than the amount to which you are entitled, you can file an amended return to remove the ERC. Or if you need to make other adjustments to your return, you should file an amended return. If, however, you want to withdraw your ERC claim and do not need to make any other adjustments, consider whether you are eligible to
Keep in mind that if you have already been contacted by the IRS because of questions about your return, you will either need to justify your eligibility for everything claimed on your return or file an amended return.
To report tax-related illegal activities relating to ERC claims, submit by fax or mail 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.
Submit by Mail:
Internal Revenue Service Lead Development Center
24000 Avila Road
Laguna Niguel, California 92677-3405
Submit by Fax:
Alternatively, taxpayers and tax professionals may send the information to the IRS Whistleblower Office for possible monetary reward.
For more information, see Abusive Tax Schemes and Abusive Tax Return Preparers.
Employers should also report instances of fraud and IRS-related phishing attempts to the IRS at email@example.com and Treasury Inspector General for Tax Administration at 800-366-4484.
Choose Your Tax Professional Carefully
The Taxpayer Advocate Service (TAS) urges you to use caution when choosing a tax return preparer. Anyone can be a paid tax return preparer as long as they have an IRS Preparer Tax Identification Number. However, tax return preparers have differing levels of skills, education and expertise. A major red flag is when the tax return preparer is unwilling to sign the dotted line. Avoid these “ghost” preparers.
Need Help Claiming the ERC?
If you need help claiming the credit, or if you claimed the credit improperly and need help amending your return, find tips for choosing a tax professional at IRS.gov.
For information on reporting illegal activities relating to the ERC, visit IRS.gov/ERC.
Tax professionals and others can register for a November 2 IRS webinar, Employee Retention Credit: Latest information on the moratorium and options for withdrawing or correcting previously filed claims. Those who can’t attend can view a recording later.
For Further Reading on ERC Scams and Schemes See: