Predatory entities have popped up offering business owners big tax breaks by pitching the Employee Retention Credit in bad faith. Here’s what to look out for.
When the US government rolled out the Employee Retention Credit in March 2020 to respond to the COVID-19 pandemic, it did not anticipate it would have over $2 trillion in suspicious claims to reckon with by 2022.
Last month, the IRS warned taxpayers to be on alert about fake ERC solicitation from a third party. For a small or medium size business, this type of tax savings – up to $26,000 per employee – can make a big difference to their bottom line. But if it sounds too good to be true, it probably is.
Fast Facts About the ERC
The Employee Retention Credit was introduced as part of the CARES Act. This economic stimulus bill was passed in 2020 to provide support to businesses and individuals in response to COVID-19. The ERC rewarded businesses that continued to pay employees after their doors were shut or businesses that experienced financial hardship resulting in, “a significant decline in gross receipts (IRS).”
For most, the credit applies to wages paid during a very specific time period – between March 13, 2020, and September 30, 2021, which the majority of qualified businesses declared. Employers can also be qualified for an ERC for wages paid after September 30, 2021; however, this is a minority of ERC claims, and most of the entities claiming this time period are recovery startups.
An ERC is different from other CARES Act relief efforts, such as PPP and EIDL, in that it doesn’t require business owners to pay the money back or spend it in a certain way. The credit is simply tied to payroll and is calculated once a quarter. Businesses that claim an ERC alongside their payroll tax returns could reduce the credit amount from their payroll tax dues.
Businesses that missed claiming an ERC alongside their quarterly payroll taxes can still receive credit by amending their tax returns using Form 941-X. To do so, businesses need to amend within three years of filing or two years from the pay date, whichever is later.
Potential Fraud Announcement
In late October of this year, the Internal Revenue Service released a, “buyer beware,” notice to taxpayers. It stated that some third parties are encouraging employers to claim an ERC when the business itself does not qualify. Moreover, these third parties are charging large upfront fees or a fee that is related to the amount of the refund without disclosing that wage deductions claimed on a business’s income tax return must be reduced by the amount of the credit.
By the spring of 2022, the Treasury had identified 11,096 suspicious returns claiming more than $2 trillion in tax credits. Later, in the summer of 2022, the Treasury Inspector General for Tax Administration admitted that, “the IRS does not have processes to verify a recovery startup business or effective controls to deny the Employee Retention Credit for non-recovery startup businesses.” Since then, the market has seen companies promising tens of thousands to anyone who hires them.
Third Parties Target Employers
Even though the tax credit has been benefiting business owners for over two years now, the announcement from the TIGTA spurred a windfall of shady third-party companies promising eligibility and significant tax benefits.
With inflation at an all-time high and a possible looming economic downfall in the air, it makes sense for these companies to pursue business owners with these seemingly low-risk, high-reward tax benefits. Only for these companies to collect their fees and then leave the business owner to potentially face the consequences of repayment of the credit, plus penalties and interest.
How Business Owners Can Protect Themselves
Employers can avoid trouble with the IRS by educating themselves about any third-party tax group that solicits them and by gathering details about how your tax group can specifically benefit your income tax return.
First off, there are currently only three ways to be eligible for an ERC:
- If, by Covid-related government restrictions, your business was partially or fully shut down, you qualify.
- If your business experienced a significant decline in gross receipts in 2020 or 2021 compared to 2019, you qualify.
- If you began doing business after February 15, 2020, with less than $1,000,000 in annualized gross receipts, you qualify.
If you do receive a call or text with a solicitation regarding an ERC, ask about eligibility and what the payout structure looks like. If the company claims, “you are eligible, and your CPA doesn’t want you to know,” that is a red flag. Part of a qualified tax specialist’s job is to tell clients about new opportunities for tax benefits – when they qualify.
Ensuring Your Accurate Tax Return
With all the changes in tax codes since 2020, it can be difficult to navigate the financial fine print on your own. Our team at National Tax Group has studied the requirements for the ERC closely, and it is our mission to maximize your tax returns with rigorous adherence to IRS guidelines. If you think you qualify for an Employee Retention Credit, call our staff to claim your free analysis.