The Employee Retention Credit (ERC) encouraged businesses to keep their employees on payroll during the height of the pandemic. However, the IRS has some new information for us as the economy tightens.
Related: What Is the ERC?
In October 2022, the IRS warned taxpayers about third parties promoting claiming enormous Employment Retention Credit (ERC) refunds for businesses that aren’t genuinely eligible for the credit.
Here’s what you need to know.
Table of Contents
The Basics of ERC
Introduced in March 2020, the Employee Retention Credit is part of the CARES Act, targeting businesses that continued to pay employees while facing financial difficulties during the pandemic.
For most qualified businesses, this credit applies to wages employers paid between March 13, 2020, and September 30, 2021. However, recovery startup businesses (RSBs) can claim the ERC for wages paid after the September deadline.
The ERC is calculated quarterly and tied to payroll. In addition, businesses that didn’t claim it when filing their returns originally can file an amended return to get the benefits of the credit. You can still file within two years of paying the tax or within three years of filing by submitting Form 941-X to the IRS.
Do you want to check if you’re eligible for the ERC? Click here to talk to our tax consultants about this tax incentive and find out if you can get money back for keeping employees on payroll.
The False ERC Claim And Third-Party Problem
As you might’ve guessed, this “free money” proved tempting to many businesses. Over the summer, the Treasury reported some concerns — that the IRS doesn’t have a process in place to verify recovery startup businesses or controls to deny the ERC to non-RSBs. As a result, the IRS identified over 11,000 suspicious returns claiming the ERC, resulting in over $2 trillion.
However, there’s another problem: Aggressive “ERC mills,” which are third parties that promise taxpayers huge refunds by claiming they are eligible for the ERC even when they are not.
It’s not uncommon for business owners to receive emails claiming they can receive a large amount in ERC credits without having any information about their business, employees, or financials.
But the ERC has been around for over two years; why are the solicitations to businesses more prominent than ever? As small business owners begin to feel uneasy with recession concerns and high inflation, they make an easy target for these ERC mills.
The IRS’s Stance on Invalid Claims and ERC Mills
In October 2022, the IRS warned about these third parties taking advantage of taxpayers. They also made it clear that taxpayers are 100% responsible for the information they report on their tax returns — claiming the ERC when you aren’t eligible can result in repayment plus interest and penalties.
Plus, many taxpayers that went through these third parties paid them fees to claim the credit, making it even more painful for small business owners.
Related: Accounting for Startups
ERC Information for Taxpayers
So now the question is how taxpayers can avoid this potential hit from ERC mills and false claims. The first thing to know is that every business doesn’t qualify for the ERC, no matter what a third party might tell you. So talk to your tax advisor about eligibility and any steps to help you avoid a nasty surprise after filing.
And if you are eligible, don’t expect to get that credit immediately; the IRS still has millions of unprocessed Forms 941 and Forms 941-X as of October 2022. While all those returns don’t involve the ERC, only two specific sites staffed with ERC-trained employees are working on this inventory, making delays more common.
Red Flags to Watch Out For
With how beneficial the ERC can be to qualified businesses and all of the false claims going around, telling a mill from a genuine offer to help is challenging. So when evaluating your options, review this list of red flags to look out for:
- Offers to file for the ERC when your business doesn’t run payroll
- A refund that’s higher than your total payroll
- Solicitations promising a refund without knowing your payroll or financial information
How to Know If You Legitimately Qualify for the ERC
So, someone reaches out to you and tells you that your business qualifies for the ERC, and they can help you claim it. They might say to you one of the following (all of which are untrue):
- All businesses can get the ERC.
- You can get $26,000 per employee (this is the absolute maximum).
- Your CPA won’t help you get the credit because it’s too much work.
Then, they promise to get you the ERC refund if you pay them a percentage (typically 25% or more). How do you know if you actually qualify?
There are only three ways that your business can be eligible for the ERC:
- Businesses that were fully or partially shut down because of government orders related to COVID-19
- Businesses with a significant decline in gross receipts from 2020/2021 to 2019
- Recovery startup businesses started after February 15, 2020
Numbers two and three are based on clear facts — the solicitations mostly focus on the first requirement. They’ll make claims like every business was affected by the government orders, everyone saw a decline in sales, supply chain disruptions affected all businesses, etc.
However, to qualify for the ERC, a government order must have compelled you to suspend at least part of your business operations — like seating restrictions in restaurants once they reopened.
How do you know if you qualify for the ERC? Speak with one of our ERC tax experts today.
ERC Next Steps
There is a ton of information and advice about the ERC out there — some good and some bad — and it can be challenging to sift through; the best thing to do is ask your tax professional about your eligibility and how to claim the ERC. After all, they want you to get anything you’re entitled to receive.
Related: What Is the WOTC?
If you were pulled into a fraudulent scheme by a third party, you might need to file a corrected return. In addition, the IRS urges businesses that dealt with these false ERC claims to file Form 3949-A and report the fraud to TIGTA.
Finally, tax professionals and the IRS will quickly point out to taxpayers that if an offer seems too good, then it probably is — ERC claims are no different.