Haunting Reality for Employee Retention Credits

Tax Tip Tuesday

What began as the government helping the business owner has now turned into the IRS haunting businesses.  That’s because some businesses obtained ERC monies fraudulently – knowingly or even worse, unknowingly.  Even spookier, is that IRS audits of this program are continuing to increase significantly.

What is ERC? 

The Employee Retention Credit program is a broad-based refundable tax credit designed to encourage employers to keep employees on payroll during the COVID-19 pandemic.  The program was launched in April of 2020, right on the heels of the PPP Loans in March of 2020.   It provided some relief for struggling businesses who kept employees on their payrolls even when government pandemic restrictions required them to suspend operations, or because their gross receipts were negatively impacted.  The ERC program was super beneficial for some businesses even in 2021 as they were just starting to get their head above water from the effects of the pandemic.

What is the spooky part? 

Audits of this program have increased significantly!  This is because the IRS ran a pilot program in July and August 2022 and recovered enough money from fraudulent claims that they are now assigning 80 – 90% of their examiners to work on these ERC audits. The workloads are already assigned and they’re waiting on agent training to finish in October and November. It also means that those who filed fraudulent ERC claims, will also be charged with fines and penalties.

The IRS has gotten smarter.  While IRS has no way of knowing your sales by individual quarter, they do have access to your total sales data for the years for comparison.  They also have access to the amount of payroll that you paid in each year compared to the credit you requested.  If those metrics are off and they know you got an ERC, expect to have those supporting documents ready to be audited by an ambitious IRS agent looking to make a name for himself.

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Why are there so many fraudulent claims? 

There are numerous scammers running ads and sending emails informing business owners that there’s a credit available and you qualify for it.  They position it as if it’s free money and you better claim it before it’s gone.  It’s not free money and it’s only available to businesses that truly struggled during the pandemic by having a loss of sales, AND also kept employees on payroll.

How do I recognize an ERC scam?  You may be getting scammed if….

  • You are getting inundated with emails, calls, radio ads, and TV ads about a NEW tax credit program.
  • You asked your accountant if you qualify and they told you no, but the ERC scammer says you do qualify.
  • Your accountant prepares your ERC claims and comes up with one number, but your ERC scammer did their own calculation and came up with a different, typically higher number.
  • The ERC scammer fails to provide assurance on defending their work in case of an IRS audit.
  • The ERC scammer pretends to be associated with established providers but offers no validation to that claim.
  • The ERC scammer won’t sign their own name to a document and will only “help” you fill out the forms or come up with the calculation.
  • The ERC scammer establishes a specific amount of credit that you are owed without thoroughly reviewing all of the relevant sales and payroll information.
  • The ERC scammer takes a percentage of the refund that you receive and asks for it up front while you wait weeks if not months for your credit check in the mail. (Your accountant and payroll company SHOULD charge a fee for their work, but there is no reason anyone should be taking a percentage of the refund.)

Shouldn’t my payroll company alert me? 

Don’t assume that your payroll company, who you may consider your second line of defense, will catch the scam either.  Typically, payroll companies are just going to do what they’re told based on whatever you emailed them, which doesn’t make the filing accurate, and it doesn’t make it correct or legal.

Ultimately, a fraudulent tax return is being filed whether you understood that at the time or not. The person who emailed you, who is likely taking a 20% commission upfront, knows that it’s probably not legit calculations but they’re going to take that gamble that the IRS will never call them on it.

Is it too late to apply? 

Business owners can still claim the ERC for eligible employees for all of 2020 and part of 2021 on taxes filed in 2022  up to three years after filing or two years after paying, whichever is later. Errors or mistakes found can still be reported as well.  But there are a lot of qualifications and caveats that it gets quite confusing.  Some of the confusion lies with the rules for whether you were or were not a recovery startup business.  Then there are the financial qualifications and established parameters to determine eligibility and the amount of eligibility.

Is there a simple way to determine eligibility or if mine was fraudulent?

Of course!  Because the government has made things so complicated and business owners have little time to figure this all out, that it can quickly become your worst nightmare.  Saunders Tax & Accounting is your simple solution. 

We are thoroughly knowledgeable on all aspects of the Employee Retention Credit.   We can determine eligibility and assist you in still taking advantage of this credit if, in fact, you qualify.  We can even review the ERC credit you have received to confirm that it was legit.  It is unlikely that you will  know if you filed a fraudulent return if you unintentionally used a scammer to determine your eligibility. It can quickly become a nightmare.  But it doesn’t have to. 

Get peace of mind and expert assistance from a local company who can be your business’ advocate.  Contact us at 301-714-2071 or at www.SaundersTax.com .  Then, you, too, can experience a Less Taxing Life and More Prosperous Solutions. 

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