Employee Retention Credit Scams

Recently, the IRS has reported an increase in Employee Retention Credit scams (ERC) where third parties advise employers to claim the credit when they do not actually qualify for it. This is done by taking a loose interpretation of the credit requirements that disregard the taxpayer’s actual eligibility or a proper calculation of the credit.

As these scams become more and more prevalent, it is important to be on guard and keep an eye out for the warning signs to not fall prey to these bad actors. The first step is to understand what the ERC is and if you qualify.

What is the Employee Retention Credit and Who Qualifies?

The ERC was established to provide a refundable employment tax credit to assist businesses with the cost of keeping staff employed, particularly during the COVID-19 pandemic. However, determining eligibility for the credit can be complex and it is always best to work with your trusted CPA to determine if it applies to your business.

In order to qualify for the ERC, your business must have had a 50% or more reduction in gross receipts for 2020 or a 20% or more decline for 2021 when comparing that calendar quarter to a comparable quarter in 2019. The other option is to prove that your business experienced a full or partial suspension of operations due to a government over. The determination if you experienced a partial suspension varies depending on the location of the business and government orders.

The lure of claiming the ERC can be enticing when there is a large amount of money at stake, but it is important to remember that you absolutely must meet the above requirements and any loose interpretation of these requirements that a third party company claims to offer you are incredibly suspect.

How Does an Employee Retention Credit Scam Work?

A scammer will be aggressive in their approach by directly soliciting an employer or promoting their services through a paid advertisement. They will ask for a large up-front fee based on the amount of refund they are promising. Often, when you do sign an agreement with one of these third parties it will state that this up-front commission is retained regardless of if you later decide you do not qualify for the ERC.

Even if the scammer claims to provide audit protection, note that audit protection would only be covered for up to one year but the statute of limitations with the IRS is five years.

Consequences of Falling for an ERC Scam

The consequences of erroneous claiming of the ERC are incredibly serious. It will lead to not only repaying the credit but will include penalties and interest. The IRS is very aware of these scams and the potential for abuse of the ERC and are monitoring these claims closely.

How Can You Avoid a Scam?

If you are at all interested in claiming the Employee Retention Credit and believe that you meet the stringent requirements, work with your trusted CPA advisor to ensure that you are truly eligible.

If you do happen to fall prey to an Employee Retention Credit scam, Olsen Thielen can help you navigate those difficult waters and take the appropriate corrective actions. Contact our tax experts with any questions on the ERC.

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DISCLAIMER: This blog is provided for informational purposes only and is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant. Presentation of the information in this article does not create nor constitute an accountant-client relationship. While we use reasonable efforts to furnish accurate and up-to-date information, the evolving landscape surrounding these topics is supported by regulations or guidance that are subject to change.

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