Want to avoid ERC scams? Know the red flags.

You know it’s bad when it makes the Dirty Dozen.

The IRS recently announced 12 “worst of the worst tax scams” of 2023. Rounding out their annual “Dirty Dozen” list was a phenomenon that’s become a major headache for businesses and the IRS alike: Employee Retention Credit scams.

Today, we’re explaining how to spot suspicious promoters and protect your business.

What is the ERC?

Created by the CARES act, the Employee Retention Credit (ERC) is a refundable tax credit. It is designed for businesses that continued to pay employees and experienced a significant decline in gross receipts during the COVID-19 emergency. Your business might qualify for the ERC if you meet one or more of the following criteria:

  • You suspended your operations (fully or partially) due to government orders during the COVID lockdown.
  • You experienced a significant decline in gross receipts during 2020 or the first three quarters of 2021.
  • You qualified as a recovery startup business for the third or fourth quarters of 2021.

How much can you claim? For the year 2020, a business can claim 50% of up to $10K in qualifying wages per employee for the year (a max of $5K per employee). For 2021, businesses can claim 70% of up to $10K in qualifying wages per employee per quarter (a max of $21K per employee for the year).

The ERC is a powerful program that has benefited numerous businesses with legitimate claims.

Unfortunately, not everyone is filing claims for the right reasons.

The “Scam-demic”

As you read this, the IRS is wading through a flood of Employee Retention Credit (ERC) claims.

Many of these claims are legitimate, filed by businesses that qualified for the tax break.

But many are not. In fact, there are so many illegitimate ERC claims that the IRS has had to reallocate resources to carefully review wave after wave of claims, with more pouring in every day.

For businesses that took an illegitimate credit, the penalties are severe. They will have to pay the credit back in full, with penalties and interest. For many businesses, a sudden cost like that can lead to a cash flow crisis.

How did we get here?

When the ERC was created, it spawned an entire sub-industry of solicitors. The abusive tax-promoters within this group are dedicated to wildly misrepresenting who can qualify for the credit and how much a business can claim.

Their tactics are simple and ruthless. They hit businesses with aggressive marketing, calling and emailing until they get a response. Then, they make enticing statements about the large refund that is free money for the taking.

According to IRS Commissioner Danny Werfel, many promoters pressure their clients into filing for ERC, then “pocket handsome fees while leaving those claiming the credit at risk of having the claim denied or facing scenarios where they need to repay the credit.”

This industry of false promises emerged around the same time as the ERC. Despite the IRS’ repeated warnings, it continues to proliferate today.

In the “scam-demic,” the only winners are the abusive tax promoters. The IRS is left to wade through a flood of claims, causing delays. As a result, many businesses are still waiting for their legitimate claims to be reviewed. Others, meanwhile, are discovering that their claims have been denied. And in the worst case scenario, a refund received will be audited in the future, resulting in the business having to repay the refund along with interest and penalties.

Red Flags

If the flood of illegitimate claims is any indication, the ERC promoters are good at what they do. Their tactics are sophisticated, their pitches are aggressive, and they know how to apply the right pressure at the right time.

Fortunately, they’re still relatively easy to spot and avoid, when you know what to look for.

Here are some common signs of suspicious solicitors:

  • They market to your business aggressively and directly. There are numerous ads all over the internet and TV, making wildly exaggerated claims about ERC. Often, promoters will take it a step further and contact your business directly, suggesting that you can claim a specific dollar amount. Not only is the figure almost certainly bogus – how could they possibly know? – their total confidence in your business’ eligibility is itself a red flag. Anyone outside your business who claims you are owed a credit, or claims they can determine your eligibility in a few minutes, is making big claims on little to no evidence.
  • Their fee is based on a percentage of the ERC refund claimed. This is a red flag for any tax preparation service, whether it’s business or personal. In the case of ERC, abusive promoters will inflate your refund to raise their fee, leaving you with a hefty IRS repayment down the road.
  • They charge a large upfront fee to claim the credit. While some ERC promoters charge a percentage-based fee after the refund is claimed, others prefer to get their money upfront. These promoters only care about getting their fee and will do their best to convince you that your business is eligible for the credit whether or not it’s eligible.
  • They leave out key eligibility details. Promoters are on a mission to get you to apply for ERC at all costs. As a result, they often make sweeping claims of eligibility without explaining the ERC’s many restrictions. (For example, they probably won’t mention that businesses that took PPP loans cannot claim the credit on the same wages.) When questioned, they often can’t accurately explain ERC’s eligibility requirements.

The Bottom Line?

Due to the IRS’ increased scrutiny and the proliferation of scammers, businesses should proceed with caution when applying for the Employee Retention Credit. Work with trusted professionals, not solicitors who make big promises, and only apply for the credit if you are certain that your organization qualifies.

Partner with the CPAs Chicagoland Trusts

At Dugan + Lopatka CPAs, we take a proactive, hands-on approach to helping our clients move with clarity and confidence. For nearly 50 years, we have served businesses and nonprofits in the greater Chicagoland area. We work directly with your management team to help you develop strategies, minimize your tax burden, and make decisions with confidence.

From tax management to compliance, bookkeeping to business advisory, we provide a full range of accounting solutions. Connect with D+L today.

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