The IRS has issued a warning to taxpayers and businesses about unscrupulous promoters who are falsely advertising the availability of Employee Retention Credits (ERCs) in order to gain fraudulent refunds.
Unscrupulous promoters charging high fees and peddling false hopes of large tax deductions often come up with new ways to cheat the system and market them aggressively.
“We urge honest taxpayers not to be caught up in these schemes,” IRS Commissioner Danny Werfel said in a statement. “The aggressive marketing of these credits is deeply troubling and a major concern for the IRS.”
The ERC has been a lifeline for millions of businesses during the COVID-19 pandemic, providing a refundable tax credit to employers who continued paying their employees amid lockdowns or experienced a significant decline in gross receipts during the eligibility periods. However, the credit is only available for a limited group of businesses and is not available to individuals.
Businesses must think carefully before filing a claim for ERC, according to the IRS, which says it is actively auditing and conducting criminal investigations related to false claims for these credits. The IRS warns that it has trained auditors examining these types of claims and the agency’s criminal investigation division is on the lookout for fraudulent claims.
Taxpayers are ultimately responsible for the accuracy of the information on their tax return, and claiming the ERC when they’re ineligible could result in penalties, the IRS cautioned.
“Taxpayers should remember that they are always responsible for the information reported on their tax returns,” Werfel said. “Improperly claiming this credit could result in taxpayers having to repay the credit along with potential penalties and interest.”
Tax professionals have also reported receiving undue pressure from clients to participate and claim the ERC, even when the tax professional believes the client is not entitled to the credit, according to the IRS.
The agency urged members of the tax professional community to advise clients not to file ERC claims when the professional believes they do not qualify.
Properly Claiming the ERC
Properly claiming the ERC can be a complex process, the IRS says, and it’s important for businesses to understand the eligibility requirements before filing a claim.Taxpayers who are eligible can claim the ERC on an original or amended employment tax return for qualified wages paid between March 13, 2020 and Dec. 31, 2021, the IRS notes.
However, employers must meet certain requirements to be eligible for the credit.
First, the employer must have sustained a full or partial suspension of operations owing to government orders restricting commerce, travel, or group meetings because of COVID-19 during 2020 or the first three quarters of 2021. This means that the employer must have been forced to shut down or reduce operations due to government-mandated COVID-19 restrictions.
Second, the employer must have experienced a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021.
The IRS’s annual Dirty Dozen list of common tax scams includes: phishing, Social Security Number scams, ransomware, fake charities, senior fraud, COVID-19 scams, cryptocurrency scams, social media scams, impersonator phone calls, identity theft, inflated refund claims, and promoter fraud.
