Beware of Uptick in Employee Retention Credit Scams
The Employee Retention Credits (ERC): Beware of Uptick in Scams
More and more, fraudsters and scammers alike are taking advantage on the general confusion, uncertainty and complexity around the Employee Retention Credit (ERC). Through all the usual channels—TV ads, direct mail, official looking letters, emails and more—unknown sources are claiming that your business or nonprofit is missing out on benefits of the ERC to put you in harm’s way so that they may realize financial gain.
Understanding the ERC
The ERC (sometimes referred to as the ERTC, the Employee Retention Tax Credit) is a refundable tax credit for businesses or nonprofits that continued paying employees while they were shut down due to the pandemic in 2020 and 2021, or suffered significant declines in gross receipts from March 13, 2020, to December 31, 2021. For more information on the basics of the ERC, please see our article here.
Prevalence of scams
Because of the high value of the ERC and since it can still be claimed on amended returns until April 15, 2025, fraudulent “consultants” are offering to help businesses and nonprofits claim the credit. The ERC is a complex program and adherence to its requirements is critical to avoid issues with the IRS. But, fraudsters and scammers unfortunately prey on the uninformed with inflated promises to generate business from innocent clients. In return, they reap excessive upfront fees or commissions (often in the thousands of dollars or at a high percentage of the “refund” they claim to be able to achieve).
The IRS has called the amount of misleading marketing around the credit “staggering,” and it has grown so serious that the IRS has included it in its annual “Dirty Dozen” list of the worst tax scams in the country.
Examples of this fraud include:
- In recent guidance, the IRS explained that supply chain disruptions generally don’t qualify an employer for the credit unless the disruptions were due to a government order. It’s not enough that an employer suspended operations because of disruptions — the credit applies only if the employer had to suspend operations because a government order caused the supplier to suspend its operations.
- In Utah, for example, the U.S. Department of Justice has charged two promoters, who did business as “1099 Tax Pros,” with participating in a fraudulent tax scheme by preparing and submitting more than 1,000 forms to the IRS. They claimed more than $11 million in false ERCs and COVID-related sick and family leave wage credits for their clients.
- A recent congressional hearing found that some of the problems can be traced back to the entirely paper application process created for the credit. This has contributed to a backlog of nearly 500,000 unprocessed claims, out of more than 2.5 million claims that have been submitted.
It’s unclear how much progress the IRS has made on the backlog, but the agency announced that it has entered a new phase of intensified scrutiny of ERC claims. Compliance, audit and criminal investigation work has increased on ERC claims, and the IRS has established additional procedures to deal with ERC fraud and suspect claims.
Red flags to watch for
The IRS has identified several warning signs of illegitimate promoters, including:
- Unsolicited phone calls, text messages, direct mail or ads highlighting an “easy application process” or a short eligibility checklist (the rules for eligibility and computation of credit amounts are quite complicated),
- Statements that the promoter can determine your ERC eligibility within minutes,
- Hefty upfront fees,
- Fees based on a percentage of the refund amount claimed,
- Preparers who refuse to sign the amended tax return filed to claim a refund of the credit,
- Aggressive claims from the promoter that you qualify before you’ve discussed your individual tax situation (the credit isn’t available to all employers), or
- Refusal to provide detailed documentation of how your credit was calculated.
The IRS also warns that some ERC “mills” are sending out fake letters from nonexistent government entities such as the “Department of Employee Retention Credit.” The letters are designed to look like official IRS or government correspondence and typically include urgent language pushing immediate action.
Protect yourself
If you think you may qualify for the ERC or have remaining questions about what you have already submitted to the IRS, consult with your tax professional. Qualified professionals will have detailed information on your eligibility, where it helps and the pros and cons of its application within your returns. Every taxpayer wants to maximize their rightful opportunities to reduce their tax burden under the law, but skepticism is warranted whenever something seems too good to be true. Please let us know if you have any questions or concerns about the ERC.
