The ERC is a legitimate credit created to support small businesses during the Covid-19 pandemic. However, it also sparked an opportunity for a lot of specialist firms falsely promising business owners they qualify for this complicated tax credit.
In a further warning to people and businesses, the IRS added widely circulating promoter claims involving ERCs as a new entry in the annual Dirty Dozen list of tax scams.
In its Dirty Dozen list of tax scams, the IRS spotlighted Employee Retention Credits following blatant attempts by promoters to con ineligible people to claim the credit. The IRS highlighted schemes from promoters who have been blasting ads on radio and the internet touting refunds involving Employee Retention Credits, also known as ERCs. These promotions can be based on inaccurate information related to eligibility for and computation of the credit.
The IRS is stepping up enforcement action involving these ERC claims, and people considering filing for these claims – only valid during the pandemic for a limited group of businesses – should be aware they are ultimately responsible for the accuracy of the information on their tax return. The IRS reminds all taxpayers that the willful filing of false information and fraudulent tax forms can lead to serious civil and criminal penalties, one of them being the Erroneous Claim for Refund or Credit penalty which applies on claims for refund or tax credits for an excessive amount and a reasonable cause does not apply. In cases of erroneous claim for refund or credit, a penalty amount is 20 percent of the excessive amount claimed. An “excessive amount” is defined as the amount of the claim for refund or credit that exceeds the amount allowable for any taxable year.
The IRS Small Business/Self-Employed division has trained auditors examining these types of claims, and the IRS Criminal Investigation Division is on the lookout for promoters of fraudulent claims for credits.
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.
Tax professionals have reported receiving undue pressure from clients to participate and claim the ERC, even when the tax professional believes the client is not entitled to the credit. The IRS encourages the tax professional community to continue to advise clients not to file ERC claims when the tax professional believes they do not qualify.
Third party promoters of the ERC often don't accurately explain eligibility for and computation of the credit. 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 these third-party promoters fail to explain this limitation. In addition, some third parties do not inform employers that they cannot claim the ERC on wages that were reported as payroll costs in obtaining Paycheck Protection Program loan forgiveness.
Additionally, some of these promoters exist solely to collect the taxpayer's personally identifiable information in exchange for false promises. The scammers then use the information to conduct identity theft.