If you own a business, you may have been approached by mail, email, or telephone by marketers who claim that they can get you a tidy chunk of government money by preparing your application for the Employee Tax Credit (ERC). While the credit is real, aggressive promoters are wildly 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 Employee Retention Credit (ERC), also sometimes called the Employee Retention Tax Credit or ERTC, is a legitimate tax credit. Many businesses legitimately apply for the pandemic-era credit. But improperly applying for the ERC can land your business in hot water.

Identifying fraudulent and improper ERC applications is an ongoing priority area for the IRS, 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. So realize that improper claims for the ERC are likely to be discovered.

Those who are found to have improperly claimed the ERC will be required 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. So, it’s important to avoid getting scammed.

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 that had a significant decline in gross receipts during the eligibility periods. The credit is not available to individuals.

Warning signs of aggressive ERC marketing

Many Employee Retention Credit scams have certain characteristics in common. Warning signs to 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 Employee Retention Credit claimed.
  • Aggressive claims from the promoter that the business receiving the solicitation qualifies before any discussion of the group’s tax situation. In reality, the Employee Retention Credit is a complex credit that requires careful review before applying.
  • Suggestions from marketers urging businesses 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.

These promoters may lie about eligibility requirements. In addition, using these companies could put you at risk of someone using the credit as a ploy to steal your identity or take a cut of your improperly claimed credit.

How the promoters lure victims

There are a variety of ways that promoters can lure 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 mailing. Some ERC mills are sending out fake letters to taxpayers from the non-existent groups like the “Department of Employee Retention Credit.” These letters can be made to look like official IRS correspondence or an official government mailing with language urging immediate action.
  • Leaving out key details. Third-party promoters of the ERC often don’t 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.
    • For example, only recovery startup businesses are eligible for the ERC in the fourth quarter of 2021, but promoters fail to explain this limit.
    • Again, the 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 Employee Retention Credit. This causes a domino effect of tax problems for the business.
  • Payroll Protection Program participation. In addition, many of these promoters don’t tell employers that they can’t claim the ERC on wages that were reported as payroll costs if they obtained Paycheck Protection Program loan forgiveness.

How businesses can protect themselves

There are simple steps that businesses, tax-exempt groups and others being approached by these promoters can take to protect themselves from making an improper Employee Retention Credit application.

  • Work with a trusted tax professional. Eligible employers who need help claiming the credit should work with a trusted tax professional. Don’t rely on the advice of those soliciting these credits. Promoters who are marketing this ultimately have a vested interest in making money; in many cases they are not looking out for your best interests.
  • Don’t apply unless you believe you are legitimately qualified for this credit. Consult with a trusted tax professional—not someone promoting the credit—to get critical professional advice on the ERC.

This article carries no official authority, and its contents should not be acted upon without professional advice. For more information about this topic, please contact our office.