The Employee Retention Credit (ERC) is a valuable tax credit that can be worth thousands or even hundreds of thousands of dollars to some small businesses. Unfortunately, some disreputable actors have sought to capitalize on its value, leaving a mess for taxpayers and the IRS to clean up. Now the IRS is taking steps to slow down the flood of fraudulent claims, first with a moratorium and more recently with a program that allows taxpayers to withdraw their claim.
Background of the Employee Retention Credit
Also known as the Employee Retention Tax Credit (ERTC), the ERC is a refundable tax credit. It was created to reward small businesses for keeping their employees on payroll during the COVID-19 pandemic. Specifically, it was aimed at businesses that were shut down or that experienced a certain level of decline during 2020 or the first three calendar quarters of 2021 or that qualified as recovery startup businesses for the third or fourth quarters of 2021.
The credit closed on December 31, 2021, but eligible businesses can still claim it retroactively by filing an amended employment tax return. They have until April 15, 2024, for 2020 claims and until April 15, 2025, for 2021 claims.
Rise of ERC Scams and Improper Claims
Back in March, we wrote about “ERC mills,” third-party promoters who charge hefty fees in return for helping employers file for the credit. Unfortunately, many of these promoters are unqualified, use incorrect eligibility and computation, or fail to ensure that none of the employer’s Payroll Protection Program (PPP)-covered wages are used to calculate ERC-eligible wages. All this puts their clients at risk for audits and accusations of fraud.
While many of these marketers claim that businesses have “nothing to lose” by filing for the credit, the fact is that companies that claim the credit incorrectly will have to pay the refund amount back along with substantial penalties and interest.
By the fall of this year, the IRS had flagged thousands of ERC claims for audit and declared a moratorium on new claims that began September 14 and will last at least until December 31, 2023. It will continue to process the 600,000 previously filed ERC claims but processing time will increase and taxpayers may need to provide additional documentation to verify their claims.
IRS Withdrawal Program
Alarmed by the number of small business owners who have been talked into filing ineligible claims by ERC promoters, the IRS announced a program that allows taxpayers to withdraw their claims on October 19. By withdrawing, employers can avoid repayment, penalties, and interest.
In order to be eligible, employers must meet the following requirements:
- The ERC claim was made on an adjusted employment tax return (Forms 941-X, 943-X, 944-X, CT-1X),
- The adjusted return was filed only to claim the ERC; no other adjustments were made.
- The entire amount of the ERC claim is being withdrawn
- The IRS has not paid the claim, or the recipient has not cashed or deposited the refund check
You can withdraw a claim even if you have received a notice that your claim is under audit. The IRS has detailed instructions on how to withdraw a claim here.
Withdrawn claims will be treated as if they were never filed, and no penalties or interest will be charged. However, anyone who knowingly files a fraudulent claim or assists in filing such a claim may be investigated and prosecuted.
Employers who are entitled to the credit but who have claimed more than they should have can file an adjusted return, as can employers who want to withdraw their claim but make other corrections to their employment return.
ERC Red Flags
ERC mills are rarely subtle, combining heavy-handed marketing tactics, hefty fees, and promises of fast, easy refunds. Warning signs to look out for include:
- Aggressive marketing, including unsolicited calls and text messages, advertisements, and direct mail. Direct mail may be designed to look like official IRS or government correspondence.
- Substantial upfront fees to file the claim.
- Fees based on a percentage of the refund amount claimed. The IRS warns taxpayers to avoid tax preparers who base their fees on the size of the refund.
- Statements that the business “automatically qualifies” or that the promoter can determine ERC eligibility “within minutes.”
- Preparers who refuse to sign the ERC return, which protects them from risk while exposing only the taxpayer.
The IRS has a comprehensive list of warning signs.
If you are an employer who faced shutdowns or declining business during the pandemic, we urge you to work with an experienced accounting firm and a qualified CPA to determine your eligibility for the ERC. At Tonneson + Co, we have decades of experience helping taxpayers, including small businesses like yours. We can help you determine if you are eligible for the ERC, file appropriately and organize appropriate supporting documentation, or file an amended return as needed.
Contact us at Tonneson + Co today to learn how we can help.
If you’re interested in working with Tonneson + Co, please reach out to us. We look forward to hearing from you!
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