Tax professionals and taxpayers: Beware of ERC scams

As taxpayers and tax professionals continue to see a barrage of aggressive broadcast advertising, direct mail solicitations, and online promotions involving the Employee Retention Credit (ERC), the IRS is renewing its alert for tell-tale signs of misleading claims involving the credit. 

While the ERC is real, aggressive promoters wildly misrepresent and exaggerate who can qualify for the credits. The IRS has stepped up audit and criminal investigation work involving these claims. Businesses, tax-exempt organizations, and others and their tax advisers considering applying for this credit must carefully review this limited program's requirements before applying. Those who improperly claim the credit face follow-up action from the IRS. 

Red flags: Aggressive Employee Retention Credit marketing tactics

The Employee Retention Credit isn’t simple and isn’t for everyone. It’s a complex credit that requires careful review before applying, and those improperly receiving the credit could have to repay the credit, as well as substantial interest and penalties.  

When dealing with aggressive promotors and scammers, they don’t mention anything about the proper steps to claiming the ERC. Red flags when discussing the Employee Retention Credit include:   

• Large upfront fees to claim the credit. 
• Fees based on a percentage of the refund amount of Employee Retention Credit claimed.  
• Unsolicited calls or advertisements mentioning an "easy application process." 
• Statements that the promoter or company can determine ERC eligibility within minutes. 
• Claims from the promoter that the business receiving the solicitation qualifies before any discussion of the group's tax situation. 
• Suggestions from marketers urging businesses to submit the claim because there is nothing to lose. 

It’s not uncommon for promoters to stretch the truth or flat-out lie about eligibility requirements to gain business, and it’s not always about the ERC fee. It’s not uncommon for these companies to promote the credit as a ploy to steal the taxpayer's identity or take a cut of the taxpayer's improperly claimed credit, leaving the taxpayer to pay back the credit, often plus penalties and interest. 

How the promoters lure Employee Retention Credit victims 

The IRS continues to see a variety of ways that promoters can lure businesses, tax-exempt groups, and others into applying for the credit.  

Aggressive marketing.  

Aggressive ERC marketing can be found in the same places that tax professionals traditionally market in, and then some – including radio, television, social media – including #TaxTwitter, phone calls, and text messages. 

Direct mailing.  

Some ERC mills are sending out fake letters to taxpayers from non-existent groups like the "Department of Employee Retention Credit." These letters can be made to look like official IRS correspondence or an official government mailing with language urging immediate action. 

Leaving out key details.  

Third-party promoters of the ERC often don't accurately explain eligibility requirements or how the credit is computed. They may make broad arguments suggesting that all employers are eligible without evaluating an employer's individual circumstances. 

Because promoters aren’t fully explaining the credit, the limits to the credit, or how taking the credit affects other parts of their federal income tax return, there is a domino effect of tax problems for the business. 

Payroll Protection Program participation.  

Many promoters don't tell employers that they can't claim the ERC on wages that were reported as payroll costs if they obtained Paycheck Protection Program loan forgiveness. 

How tax pros should advise their business clients and others can protect themselves 

Whether you or your clients are being approved by these promoters, there are a few simple steps to combat ERC mills and prevent improper Employee Retention Credits. 

• Advise clients proactively about these ERC mills. Make it clear that promoters who are marketing this ultimately have a vested interest in making money, rather than your client’s best interest. 
• Recommend clients contact you for guidance BEFORE applying for any ERC credits and other tax issues. 
• Don’t rely on the advice of those soliciting these credits. If you are getting marketing from ERC mills, employ professional skepticism and do your own research. 
• Report ERC abusive schemes to the IRS. You can now make anonymous reports about those companies who promote improper claims for the credit by using Form 3949-A, Information Referral, previously used to report fraud anonymously but now can be used to report questionable ERC mills. 

Properly claiming the ERC 

There are very specific eligibility requirements for claiming the ERC. These are technical areas that require review by a tax professional.  

Taxpayers who qualify can claim the ERC on an original or amended employment tax return for qualified wages paid between March 13, 2020, and Dec. 31, 2021. However, to be eligible, employers must meet one of the following: 

• Sustained a full or partial suspension of operations due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings because of COVID-19 during 2020 or the first three quarters of 2021. 
• Experienced a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021. 
• Qualified as a recovery startup.