4 Red Flags of Employee Retention Credit Abuses by Joseph Leocata, JD, CPA, MBA
Posted on September 28, 2023
by
Joseph Leocata
The introduction and subsequent expansion of the employee retention credit (ERC) offered a valuable lifeline to businesses struggling to preserve jobs and pay workers through the pandemic despite interruptions to normal operations or significant declines in gross revenue. However, over time, the IRS has identified a significant number of schemes perpetrated by criminals to con employers into claiming improper credits they are not qualified to receive. As a result, the IRS has put these schemes on its list of top tax scams for 2023 and is investing significant resources to uncover instances of fraud and abuse. In fact, the agency announced on September 14, 2023, that it is imposing a moratorium on the processing of new ERC claims it receives through the end of this year.
The ERC is a payroll tax credit available to qualifying entities that continued to pay workers through the pandemic despite suffering interruptions to normal operations due to government orders or a significant decline in gross revenue. For 2020, a qualifying decline is one in which gross receipts during any quarter in 2020, beginning after March 13, 2020, are less than 50 percent of gross receipts for the same calendar quarter in 2019. For 2021, a qualifying decline in gross receipts during any of the first three quarters of the year must be less than 80 percent of what they were during the same quarter in 2019 or 2020. The value of the credit for qualifying employers is $5,000 per employee between March 13, 2020, and Dec. 31. 2020, and $21,000 per employee for the period of January 1, 2021, through Sept. 31, 2021.
While many eligible employers have already received ERCs to which they are entitled, others are continuing to be bombarded by third parties promoting themselves as “experts” in ERC claims, charging exorbitant fees and tricking businesses into ignoring IRS guidance and filing fraudulent claims. It is important for businesses to remember that regardless of whom they work with to prepare their tax documents, they are legally responsible for the information contained in those documents and personally subject to significant civil and criminal penalties for false or fraudulent filings.
The good news is that employers can protect themselves from falling victim to these schemes when they learn to recognize the following warning signs that often accompany promoter’s claims.
- The employer receives an unsolicited call, email or direct mail advertisement for claiming the credit via an “easy application process.” If something sounds too good to be true, it probably isn’t. Call your trusted tax accountants to look out for your best interests.
- The promoter makes aggressive claims that the employer qualifies for the credit before discussing the employer’s tax situation, or it claims it can determine an employer’s ERC eligibility within minutes. In reality, the ERC is complex in its application and its eligibility requirements. For example, not all employees’ wages can be considered when calculating the credit. A careful review of these factors should be considered before applying for the credit.
- The promoter charges the employer hefty upfront fees to claim the credit. Promoters often seek to make money off the employer and steal the employer’s identity or capture its personally identifiable information to file fraudulent returns.
- The promoter bases its fees on a percentage of the credit being claimed. The IRS always advises taxpayers to avoid using tax preparers who base their fees on the size of the taxpayer’s refund.
In the current environment of expanded IRS budgets and audits, it behooves businesses to understand the rules for claiming ERCs and work with trusted tax professionals they know or who come to them through referrals to help them determine their eligibility. Work with advisors who can help represent you before the IRS and substantiate your claims with documented evidence.
About the Author: Joseph Leocata, JD, CPA, MBA, is a senior manager of Tax Services with Berkowitz Pollack Brant Advisors + CPAs, where he works with individuals and businesses on a broad range of federal, state and local tax issues, including representation before the IRS on tax controversy matters. He can be reached at the CPA firm’s New York City office at (646) 213-7600 or info@bpbcpa.com.
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