Emerging Issues and News:
August 7, 2023
IRS Ramps Up Phase II of Fraudulent ERTC Claims and Warns Businesses of Aggressive ERC Marketers
The Internal Revenue Service has made substantial progress in its efforts to discover and overturn fraudulent ERC (Employee Retention Credit) claims. IRS Commissioner, Danny Werfer said the Agency is entering a new phase of scrutiny on questionable ERC claims, with dedicated staffing to investigate fraud. IRS also continues to warn businesses of aggressive marketing by third-party ERC filers.
Deputy Commissioner of Enforcement Services, Douglas O’Donnell, spoke at a tax conference at NY University regarding the downfall that businesses may experience by using unqualified ERC preparation firms:
“These individuals who are being sold this notion that almost anyone can claim this credit by these mills—they are creating a lot of heartache for businesses because when we go out, if they’ve gotten a refund, we’re going to pull it back, and there’s going to be penalties and interest associated with it.
Those (preparers) that have gotten 25 percent of the refund as a fee for helping them, they’re gone. They’re not going to represent them. It is drawing businesses into a trap, that they will then be claiming a credit that they are not entitled to.”
When properly claimed, the ERC is a refundable tax credit designed for businesses that continued paying employees during the COVID-19 pandemic while their business operations were fully or partially suspended due to a government order or that had a significant decline in gross receipts during the eligibility periods (March 2020 to December 2021).
“The amount of misleading marketing around this credit is staggering, and it is creating an array of problems for tax professionals and the IRS while adding risk for businesses improperly claiming the credit,” Werfel said. “A terrible scenario is unfolding that hurts everyone involved — except the promoters.”
There are many legitimate ERC claims, along with qualified preparers, but how does a business identify and protect itself from being scammed by an ERC marketer.
What are the Warning Signs of Aggressive ERC Marketers:
- Unsolicited calls or advertisements mentioning an “easy application process.”
- Statements that the promoter or company can determine ERC eligibility within minutes
- Large upfront fees to claim the credit
- Fees based on a percentage of the refund amount of Employee Retention Credit claimed
- Preparers refusing to sign the ERC return being filed by the business, exposing only the business who claimed the credit to investigation risk
- Aggressive claims that the business qualifies for ERC before any discussion of the group’s tax situation or key criteria for credit
- Leaving out key details. Third-party promoters of the ERC often don’t accurately explain eligibility requirements or how the credit is computed. They may make broad arguments suggesting that all employers are eligible without evaluating an employer’s individual circumstances.
How Businesses Can Protect Themselves:
The IRS reminds businesses, tax-exempt groups and others being approached by these promoters that there are simple steps that can be taken to protect themselves from making an improper Employee Retention Credit.
- Work with a trusted tax professional. Eligible employers who need help claiming the credit should work with a trusted tax professional; the IRS urges people not to rely on the advice of those soliciting these credits. Promoters who are marketing this ultimately have a vested interest in making money; in many cases they are not looking out for the best interests of those applying.
- Request a detailed worksheet explaining ERC eligibility and the computations used to determine the ERC amount.
- Don’t apply unless you believe you are legitimately qualified for this credit.
Proper ERC Credit Eligibility:
Employers may claim the ERC on an original or amended employment tax return for qualified wages paid between March 13, 2020, and Dec. 31, 2021. There are criteria and tests for eligibility that employers must pass and are summarized:
- Sustained a full or partial suspension of operations due toorders from an appropriate governmental authority
limiting commerce, travel or group meetings because of COVID-19 during 2020 or the first three quarters of 2021,
- Experienced a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021, or
- Qualified as a recovery startup business for the third or fourth quarters of 2021.
To echo the IRS’s statements on proper filing, ensure that you have enlisted a qualified professional to review your eligibility and prepare your claim for ERC. Please contact Accavallo & Company at (203) 925-9600 or [email protected] for assistance. We are here to help.