The Internal Revenue Service is warning businesses to be on the lookout for scams that promote employee retention credit abuse as the IRS suspends processing of many claims that have flooded its offices.
Earlier this year, the IRS placed ERC scams on its annual Dirty Dozen Tax Fraud List (See the story). But the IRS and tax professionals continue to see aggressive broadcast ads, direct mail solicitations and online promotions involving employee retention credits, as described recently. Wall Street Journal article. Although the credit is real, the IRS has acknowledged, aggressive promoters grossly misrepresent and exaggerate who can qualify for the credit.
The IRS is stepping up its audit and criminal investigation work on false ERC claims. Businesses, tax-exempt organizations, and others considering applying for this credit should carefully review the formal requirements for this limited program before applying. Those who claim the credit incorrectly face further action from the IRS.
“Aggressive marketing of the employee retention credit continues to victimize innocent businesses and others,” IRS Commissioner Danny Werfel said Thursday. “Aggressive promoters make extremely misleading claims about this credit. They can pocket handsome payments, leaving those claiming credit facing denials or scenarios where they need to repay the loan.”
Tax professionals also view clients with legitimate claims with suspicion. Top 100 firm Sikich hosted a program earlier this month for financial clients to get an A-to-Z list of employee retention credit rules and regulations. He heard overwhelming recognition from those in attendance during the survey of participants that day. Sikic learned that a whopping 96% of attendees who have already applied for and received refunds related to their company’s ERC are now the target of a state IRS crackdown. IRS audits of 135 to 140 pending refund claims. In addition, 58% of respondents said they are contacted daily or weekly by ERC providers that offer “complaints and refund-related services.”
The Employee Retention Credit (ERC), also sometimes called the Employee Retention Tax Credit or ERTC, is a legitimate tax credit. Many businesses are legitimately turning to pandemic-era credit. The IRS has added additional staff to process ERC claims, which are time-consuming to process because they involve amended tax returns.
“This constant flurry of marketing by advertisers means many incorrect claims are coming in to the IRS, which means it takes longer for our hard-working employees to receive legitimate employee retention credits,” Werfel said. “The IRS understands the importance of these credits, and we appreciate the patience of businesses and tax professionals as we continue to work to get the right claims processed as quickly as possible while also protecting against fraud.”
The IRS has been issuing warnings about aggressive ERC scams since last year, and it added “Dirty Dozen” tax cheats List.
The IRS said the ERC is an ongoing priority area in many respects, and the IRS continues to increase compliance work related to the ERC. The IRS has trained auditors to investigate ERC claims that pose the greatest risk, and the IRS Criminal Investigation Division is working to identify fraud and fraudulent claim promoters.
The IRS has reminded anyone who misreports an ERC that they must pay it back, possibly with penalties and interest. A business or tax-exempt group may find itself in a much worse financial position if it has to repay the credit than if the credit had never been claimed in the first place. So it is important to avoid getting scammed.
If properly claimed, the ERC is a refundable tax credit designed for businesses that continued to pay employees during a shutdown due to the COVID-19 pandemic or that experienced a significant reduction in gross receipts during eligibility periods. Credit is not available to individuals.