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John Malone, JD, CTC
December 8, 2023

Employee Retention Credit (ERC) Scams

Tax optimization is a crucial element in financial planning for businesses. One strategy that gained prominence during the COVID-19 pandemic was the Employee Retention Credit (ERC). However, with the rise of fraudulent activities surrounding the ERC, businesses must be vigilant and informed to avoid falling victim to scams. In this comprehensive guide, we will explore what ERC is and the steps you can take to protect yourself from ERC scams. A Warning from the Former IRS Commissioner on ERC Scams During a recent client-exclusive webinar hosted by Anomaly CPA, the former IRS Commissioner, Chuck Rettig, shared his insights on the prevalence of Employee Retention Credit (ERC) scams. He emphasized the responsibility taxpayers bear in this context, offering valuable perspectives on the matter.

Introduction to the Employee Retention Credit (ERC)

The Employee Retention Credit, established by the CARES Act of 2020, is a refundable tax credit designed to assist eligible employers in covering wages and certain employer-sponsored health insurance costs. It was introduced as a part of the government's efforts to provide relief to businesses impacted by the COVID-19 pandemic. The ERC was further expanded by subsequent legislation, such as the Relief Act of 2021 and the American Rescue Plan Act of 2021, to provide additional support to businesses.

To qualify for the ERC, businesses must meet specific eligibility criteria. These include experiencing a significant decline in gross receipts or a full or partial suspension of operations due to government orders related to COVID-19. The ERC is not available to individuals and has different eligibility periods depending on the legislation that applies.

ERC Scams: A Tax Strategist's Perspective

Unfortunately, the popularity and financial benefits associated with the ERC have attracted scammers looking to exploit businesses and individuals. The Internal Revenue Service (IRS) has identified the ERC as one of the tax-related scams on its annual "Dirty Dozen" list. Scammers employ various tactics, including fraudulent claims, identity theft, and misleading fee structures, to deceive unsuspecting taxpayers.

Non-Qualified ERC Advisors

One common scam involves non-qualified advisors/promoters providing misleading information regarding ERC eligibility. These individuals may claim that every business is eligible for the credit, regardless of their actual circumstances. It is essential to work with qualified tax strategists who understand the complex ERC rules and can accurately assess your eligibility.

False or Misleading Fee Structures

Scammers often charge exorbitant upfront fees for their services, promising to secure the ERC for businesses. However, they may fail to deliver on their promises or intentionally file inaccurate claims to inflate their fees. Legitimate tax strategists typically charge fees contingent on the amount of the ERC refund, rather than demanding substantial upfront payments.

Identity Theft

ERC scams involving identity theft pose a significant risk to businesses. Scammers may pose as ERC professionals and solicit sensitive information, such as employee identification numbers (EINs) and Social Security numbers, under the guise of filing ERC claims. Protecting your personal and business information is crucial in mitigating the risk of identity theft.

Inflation of Qualified Wages Paid

Another scam involves inflating the amount of qualified wages paid to increase the ERC business tax credits. Scammers may encourage employers to report inaccurate information or falsify payroll records, potentially leading to penalties, interest payments, and audits by the IRS.

IRS Actions: Safeguarding Your Tax-Free Wealth

Recognizing the severity of ERC scams, the IRS has taken proactive steps to protect taxpayers and businesses from fraudulent activities. These actions aim to create more safeguards, prevent abuse, and ensure legitimate businesses receive the benefits they are entitled to.

Moratorium on Processing New Claims

To safeguard honest small business owners from scams, the IRS implemented an immediate moratorium on processing new ERC claims. This moratorium, initiated by IRS Commissioner Danny Werfel, is in effect until at least the end of the year i.e. December, 31, 2023. The pause in processing new claims allows the IRS to enhance its systems and implement additional safeguards to prevent future abuse.

Compliance Reviews and Extended Processing Times

The IRS has intensified its compliance reviews of previously filed ERC claims. This includes conducting audits and criminal investigations to identify promoters and businesses involved in dubious claims. As a result, processing times for existing ERC claims have been extended, with additional documentation requirements to ensure the legitimacy of claims.

Collaboration with the Justice Department

Collaboration between the IRS and the Justice Department plays a crucial role in addressing fraud within the ERC program. The IRS is actively working with the Justice Department to investigate and prosecute promoters and businesses engaged in fraudulent ERC activities. Criminal charges have been filed, and convictions have already been secured, demonstrating the commitment to combating ERC scams.

Initiatives to Assist Victims of Scams

The IRS is developing initiatives to support businesses that have fallen victim to aggressive ERC promoters. These initiatives include a settlement program for improper ERC payments and a special withdrawal option for businesses with pending claims. These measures aim to help businesses rectify their situations and avoid potential repayment issues caused by fraudulent claims.

Protecting Your Business from ERC Scams

As a responsible business owner, there are steps you can take to protect your business from ERC scams and ensure you are eligible for legitimate tax credits. By following these tips, you can navigate the ERC landscape with confidence and reduce the risk of falling victim to fraudulent activities.

Work with Trusted Tax Strategist or CPA

When it comes to navigating complex tax matters, including the ERC, it is crucial to work with trusted tax professionals. Qualified professionals with experience in tax compliance and ERC rules can provide accurate guidance and ensure your eligibility for the credit. Avoid unsolicited tax advice from individuals who contact you by phone or email.

Understand ERC Eligibility Requirements

Before filing an ERC claim, it is essential to thoroughly understand the eligibility requirements. Familiarize yourself with the criteria, including the decline in gross receipts or the suspension of operations due to COVID-19. By ensuring your eligibility and understanding the specific requirements, you can protect yourself from inaccurate claims and potential penalties.

Beware of Unrealistic Promises and Guarantees

Avoid working with ERC promoters who make unrealistic promises or guarantees regarding your eligibility or the amount of your claim. ERC eligibility calculations involve subjective components, and no promoter can guarantee a specific credit amount without a thorough evaluation of your business's circumstances. Be cautious of promoters who advertise risk-free claims.

Protect Your Personal Information

Safeguarding your personal and business information is crucial in preventing identity theft and fraudulent ERC claims. Be cautious of sharing sensitive data with unknown individuals or entities. ERC professionals should have secure communication channels, and their email addresses should match their names and company names. Avoid working with individuals who use personal email accounts for professional matters.

Be Cautious of Fee Structures

Legitimate tax professionals charge fees contingent on the amount of the ERC refund, not substantial upfront payments. Be wary of promoters who demand large upfront fees or charge nonrefundable fees. Ensure that the fee structure is transparent and reasonable before engaging with any ERC promoter.

Report Suspicious Activity

If you encounter any suspicious activity or believe you have been targeted by an ERC scam, report it immediately. Contact the IRS directly or forward suspicious emails to their designated email address for investigation. Reporting scams helps protect other businesses and individuals from falling victim to fraudulent activities.

Conclusion: Navigating ERC with  Tax Strategist

The Employee Retention Credit (ERC) provides eligible businesses with a valuable tax credit to support wages and employer-sponsored health insurance costs. However, the rise of ERC scams poses a significant threat to businesses and individuals.

By understanding the ERC, its eligibility criteria, and the actions taken by the IRS to combat scams, businesses can navigate the landscape with confidence. Working with trusted tax professionals, conducting due diligence, and protecting personal information are vital steps in safeguarding your business from fraudulent activities.

Remember, if an offer seems too good to be true, it probably is. Choose reputable professionals, stay informed, and report any suspicious activity to protect yourself and your business from ERC scams. By taking these precautions, you can optimize your tax strategy and achieve tax-free wealth while avoiding fraudulent schemes. Want to learn more about this? Connect with us now!

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