Don’t Fall for Employee Retention Credit Scams

A growing number of employee retention credit scams are afoot, and you’ve maybe gotten some aggressive calls.  Scammers are employing creative means of bilking businesses out of excessive fees or engaging in outright fraud.

This is leading to employers (including owner-operators) begging the question of, “is ERC a scam?” Yes and no.

The ERC is a refundable tax credit for businesses who continued paying employees while shutdown due to the COVID-19 pandemic or had significant declines in gross receipts from March 13, 2020–December 31, 2021. Eligible taxpayers can claim the ERC on an original or amended employment tax return for a period within those dates.

To be eligible for the ERC, employers must meet one the following conditions:

• They sustained a full or partial suspension of operations due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19 during 2020 or the first three quarters of 2021
• The business experienced a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021 PDF
• The employer qualified as a recovery startup business for the third or fourth quarters of 2021.

Only recovery startup businesses are eligible for the employee retention credit in the fourth quarter of 2021.

Eligible employers cannot claim this credit on wages reported as payroll costs to get PPP loan forgiveness or that they used to claim certain other tax credits at any time.

These third parties often charge large upfront fees or a fee that is contingent on the amount of the refund. They may also fail to inform taxpayers that wage deductions claimed on the business’ federal income tax return must be reduced by the amount of the credit.

If the business filed an income tax return deducting qualified wages before it filed an employment tax return claiming the credit, the business should file an amended income tax return to correct any overstated wage deduction.

Businesses should be cautious of schemes and direct solicitations promising tax savings that are too good to be true. Taxpayers are always responsible for the information reported on their tax returns. Improperly claiming the ERC could result in taxpayers being required to repay the credit along with penalties and interest.

For more “legal” information about the ERC, go to: https://www.irs.gov/newsroom/employers-beware-of-third-parties-promoting-improper-employee-retention-credit-claim