In response to the COVID-19 pandemic, the federal government provided several options for tax relief for businesses and tax-exempt groups, one of which was the employee retention tax credit (ERC). Some scammers, unfortunately, have stirred the attention of the IRS by aggressively misleading unsuspecting employers into thinking they are eligible to receive the credit and, as a result, manipulating them into submitting false, ineligible claims. The IRS has emphasized that organizations that improperly submit a claim for the ERC may be forced to return the credit in addition to paying additional penalties.
It is important for businesses and tax-exempt organizations to be aware of red flags that indicate they are the intended victim of a scammer. In fact, the prevalence of scammers sharing misinformation about ERC eligibility has led the IRS to add them to its list of “Dirty Dozen tax scams”.
Employers should know that legitimate claims for the ERC may be submitted on an original or amended employment tax return for qualified wages paid between March 13, 2020 and December 2021 based on the following factors:
- A full or partial suspension of operations to the business because of COVID-19, based on orders from a governmental authority
- A significant decline in gross business receipts, or
- The business qualified as a recovery start-up business for the 3rd or 4th quarters of 2021
Any additional claims of eligibility offered to a business by an unknown third-party should be treated with extreme caution as they could represent an ERC scam. Working with a trusted tax professional who can help you understand your eligibility or reviewing the eligibility requirements on the IRS website are highly recommended.
How Scammers Approach Businesses with False Claims of ERC Eligibility
Businesses receiving unsolicited calls or advertisements about applying for the credit including from third-party groups soliciting up-front fees to help the business claim the credit should be ignored or, better yet, reported. These solicitations may be made by third-party scammers that don’t reference the business’ tax situation or who suggest that a business cannot be penalized simply by applying. (The latter statement is false since, as mentioned above, businesses that improperly receive the credit may need to return it in addition to paying other fees.)
Some ways that scammers may attempt to engage businesses include:
- Radio, television, online and text ads and messages
- Direct mail letters that may look convincingly like letters from the IRS
- Solicitations that leave out key eligibility details or which claim ALL businesses are eligible
- Solicitations that fail to mention businesses can’t claim the ERC based on wages reported as payroll costs if they obtained Paycheck Protection Program loan forgiveness
ERC Scam: The Takeaways and How to Protect Your Business
Although the risks to businesses and tax-exempt groups that engage with misleading scammers can be significant, the IRS has invested in ongoing communication and education with the public. Informed business owners who have a strong understanding of ERC requirements, who have retained a knowledgeable tax professional and who recognize the tell-tale signs of fraudulent solicitations, are well positioned to avoid costly mistakes.
The IRS has, finally, published Form 14242, “Report Suspected Abusive Tax Promotions or Preparers”, providing consumers the option to report on suspected fraudulent third-party organizations. Claims may be mailed to:
Internal Revenue Service Lead Development Center
Stop MS5040
24000 Avila Road
Laguna Niguel, California 92677-3405
or faxed to 877-477-9135.
Please contact Angie Prochaska via this online contact form with any questions about how to avoid becoming the victim of an ERC scam.
Councilor, Buchanan & Mitchell (CBM) is a professional services firm delivering tax, accounting and business advisory expertise throughout the Mid-Atlantic region from offices in Bethesda, MD and Washington, DC.
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