What would you do if I told you I could guarantee your small business a refundable tax credit of $26,000 per employee—without ever having seen your books? I hope you’d run in the opposite direction.
What is the ERC?
The ERC is a refundable tax credit designed 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 to 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 have:
As a reminder, only recovery startup businesses are eligible for the ERC in the fourth quarter of 2021. Additionally, for any quarter, eligible employers cannot claim the ERC on wages that were reported as payroll costs in obtaining PPP loan forgiveness or that were used to claim certain other tax credits.
Treasury Sees a Problem
All of this free money has proved to be a temptation. This summer, the Treasury Inspector General for Tax Administration reported concerns, including that “the IRS does not have processes to verify a recovery startup business or effective controls to deny the Employee Retention Credit for non-recovery startup businesses.” By March 10, 2022, the IRS had identified 11,096 suspicious returns claiming more than $2 trillion in credits.
ERC Mills Step Up
This wasn’t news to tax professionals, who have seen an uptick in solicitations to businesses. Most concerning are the aggressive stances ERC mills take—third parties chasing taxpayers and promising huge refunds.
A client was on the receiving end of those solicitations. Last month, the client received several emails about the credit. The average credit was, one email claimed, over $50,000. And despite having no information about my business’ financials or employees, they promised that “as long as you had 3+ W-2 employees during 2020 and 2021(not including yourself), you ABSOLUTELY are eligible for the ERC.” Here is one of the solicitation email:
Spoiler alert: The client was not eligible. Clients are receiving primarily via email, although more recent ones also came by text. Mailers are also popular. Tax professionals on social media have voiced concerns about letters that appear to come from the IRS. Some even come with pre-printed checks attached. Businesses are also the target of voice mails. A colleague of mine said that one of his clients forwarded him a copy of an unsolicited voicemail that advised, “This is the credit your CPA doesn’t want you to know about.”
The credit has been around for more than two years, yet the solicitations just now feel like a feeding frenzy. Keep in mind that it should be obvious that not every business qualifies for the ERC. Businesses should ask their advisers questions, not only about eligibility but about any additional steps to take to avoid nasty surprises.
Red Flags
With so much noise about ERC, it may be challenging to tell a mill from a legitimate offer to help. When evaluating the options, here are a few red flags to look out for:
Solicitations like the one I received making promises without having access to financials or payroll information;
Offers to file when your business doesn’t even run payroll;
Refund numbers that exceed your total payroll;
Initial eligibility determinations made without regard for affiliated or commonly controlled entities or the number and relationship of employees; and
Fees based on a percentage of the recovery—Markowitz has seen some as high as 40%. While this is not necessarily indicative of an ERC mill, the IRS generally advises taxpayers to exercise care when working with tax professionals who base their fees on expected refunds since it can create an incentive to inflate numbers artificially.
What You Need to Do
You need to speak up if you believe that you have already been pulled into a potentially fraudulent scheme, since you may need to file corrected returns. If you have information about tax-related illegal activities relating to ERC claims, the IRS encourages you to submit Form 3949-A , and report fraud and IRS-related phishing attempts to TIGTA at 1.800.366.4484.
Finally, just remember that if an offer sounds too good to be true, it probably is. There are no free money fairies out there.
Additional Resources
