The Employee Retention Credit (ERC) was a good deal for businesses—until it became an even better deal for scammers.
The ERC was a refundable tax credit offered to businesses and non-profit organizations to keep lights on and employees paid during the pandemic. The generous features of the tax credit include:
- The tax credit is generally available to qualified employers (not individuals) who paid employees after March 12, 2020 to January 1, 2022.
- Businesses of all sizes are welcome to apply for the tax credit except state and local governments, their agencies, and recipients of Small Business loans. Payroll size and the portion of the cost of employer-paid health care impact wages eligible under the ERC.
- Qualified businesses are those whose businesses were partially or fully suspended due to the pandemic or whose gross receipts dropped below 50 percent of receipts in the previous comparable quarter in 2019.
- Employers who took advantage of the Paycheck Protection Program (PPP) cannot claim the ERC on wages affected by the PPP.
Overall, the ERC is a helpful program intended to bolster the survival of businesses and their employees during the pandemic years.
As we reported earlier this year, the IRS began investigating recipients and others who took advantage of the ERC for fraudulent purposes. The IRS issued a business alert describing ERC scams in May of this year. Since then, the agency has uncovered widespread tax fraud and abusive use of the program. In September, the IRS announced it had referred thousands of ERC recipients for audits and commenced more than 250 criminal investigations that could involve $3 billion in fraud.
As a result of these findings, the IRS has halted the ERC program for at least the remainder of the calendar year. While the IRS will process ERC claims already in the pipeline, processing time will likely be considerably extended.
Part of the overall problem is pop-up businesses that market the ERC program to businesses that do not qualify. These unscrupulous companies take advantage of ill-advised business owners as well as the government by filing oftentimes fraudulent ERC applications. The IRS will use the program moratorium to review the application process and add security and other measures to help businesses avoid these predatory marketers.
Notes IRS commissioner Danny Werfel, “The IRS is increasingly alarmed about honest small business owners being scammed by unscrupulous actors, and we could no longer tolerate growing evidence of questionable claims pouring in. The further we get from the pandemic, the further we see the good intentions of this important program abused. The continued aggressive marketing of these schemes is harming well-meaning businesses and delaying the payment of legitimate claims, which makes it harder to run the rest of the tax system. This harms all taxpayers, not just ERC applicants."
The IRS is planning to reduce the incidence of ERC fraud, identify and criminally prosecute those who have already scammed the program, and protect unwitting business owners from bad actors. If you are considering an ERC claim—take time to learn about the program and avoid those who are aggressively marketing their services. And for those who already realized ill-gotten gains through fraudulent ERC claims? Speak with an experienced tax attorney soon—the audits are already getting underway.
Has the IRS asked for an audit? Talk to an experienced attorney before you respond
From offices in Chicago and Cleveland, Robert J. Fedor Esq. LLC serves local, domestic, and international clients challenged by tax litigation, criminal tax allegations, and offshore tax inquiries. When you need strategic, experienced representation on criminal tax matters, call 800-579-0997 or contact us online today.