Employee retention credit can be valuable, but don’t get scammed

This blog post was originally published on October 14, 2022. It was updated on June 14, 2023.

IRS warns of ERC consultants targeting taxpayers with aggressive claims and high fees

The Internal Revenue Service, American Institute of Certified Public Accountants and other government agencies have recently published alerts to warn employers and tax practitioners of predatory consultants advising businesses to claim the Employee Retention Credit (ERC) when they may not qualify.

According to the IRS, some third parties are taking improper positions related to taxpayer eligibility and computation of the credit. These consultants are opting for aggressive marketing campaigns and spreading misinformation about who can qualify for the credit while charging excessive fees that can result in the taxpayer having the request denied or possibly having to repay the credit. They may fail to mention that wage deductions claimed on the business’ federal income tax return must be reduced by the amount of the credit. They also may not mention that there is generally no “double dipping” between credits and stimulus programs. For example, a taxpayer cannot use the same wages for Paycheck Protection Program (PPP) loan forgiveness and the ERC.

The IRS reminds taxpayers “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. So, it’s important to avoid getting scammed.” It’s important to remember taxpayers are always responsible for the information reported on their tax returns.

Warning signs of aggressive ERC marketing include unsolicited calls emphasizing an “easy application process,” large upfront fees, and claiming the consultant can determine eligibility within minutes.

To protect your business, the IRS recommends working with a trusted tax professional and to not rely on the advice of unknown solicitors. Additionally, “don’t apply unless you believe you legitimately meet the qualifications for the credit.”

In some cases, overstated claims are based upon misguided understanding of the complex rules and regulations surrounding the credit.

The Employee Retention Credit is a fully refundable tax credit for employers that meet certain criteria and applies to qualified wages and employer paid health insurance for the period March 13, 2020, through September 30, 2021. For certain employers, the credit is available through December 31, 2021.

The ERC is available for eligible employers that carried on a trade or business during calendar years 2020 and 2021 that experienced a significant decline in gross income or were affected in a more than nominal way due to a government order to fully or partially suspend normal operations. This applies to for profit and not for profit entities and sole proprietorships that have qualified wages.

Generally, taxpayers may correct overreported taxes (including claiming the ERC) on a previously filed Form 941 if they file Form 941-X within 3 years of the original due date of Form 941 or 2 years from the date they paid the tax reported on Form 941, whichever is later. Therefore, taxpayers may have until 2024 or even 2025 to claim the ERC, depending on when they filed and paid.

Contact a Kaufman Rossin tax professional to learn more about eligibility requirements for the Employee Retention Credit.