The Employee Retention Credit (ERC) is a tax relief program started by the CARES Act in 2020 and expanded by the American Rescue Plan Act in 2021. Eligible employers can receive a refundable credit against their payroll taxes as a reward for keeping their employees on the payroll during the pandemic. The ERC can be substantial, reaching up to $5,000 per employee in 2020 and $21,000 per employee in 2021, contingent on factors like the employer's size, revenue, and wages. 1
Before diving into claiming ERC, it is crucial to ensure you meet the eligibility criteria. You must show a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021 as compared to 2019 or a full or partial suspension of business operations due to a COVID-19-related government order. Receiving a PPP loan does not disqualify you from claiming ERC, though the wages used for PPP forgiveness cannot be used to claim ERC.
In these turbulent times, the ERC has been a financial lifeline for countless businesses, helping them navigate the economic challenges caused by the COVID-19 pandemic. However, as businesses rush to claim their ERC benefits, a shadowy threat lurks in the form of “ERC mills”. These unscrupulous third-party vendors promote fraudulent ERC claims, putting businesses at risk of audits, penalties, and even legal consequences.
ERC mills have become a prevalent menace, jeopardizing businesses, and the integrity of the tax system. These fraudulent vendors employ aggressive tactics, such as unsolicited cold calls, emails, and social media ads, to lure unsuspecting business owners. They make assurances of sizable reimbursements, swift outcomes, and minimal paperwork, yet their conduct is both unethical and unlawful. 1
ERC mills can be identified through various red flags:
- Contact you with no prior engagement, and pressure you to engage their services.
- Guarantee your eligibility for the ERC or promise a substantial refund without verifying your details.
- Charge exorbitant fees, often a significant percentage of your expected refund, or demand upfront payments.
- Cannot explain their process or provide you with a copy of your return.
- Lack a valid Preparer Tax Identification Number (PTIN) or an Enrolled Agent (EA) credential.
To mitigate the risks associated with fraudulent claims, IRS has taken a number of measures:
- On October 9th, 2022, the IRS started issuing warning to businesses to be wary of third parties advising them to file improper ERC claims.
- On March 20th, 2023, the IRS added ERC claims being promoted to their 2023 Dirty Dozen list of worst tax scams.
- On July 26th, 2023, the IRS announced that it was increasingly shifting its focus to review these claims for compliance concerns. It would intensify audit work and criminal investigations on promoters and businesses filing dubious claims.
- On September 09th, 2023, the IRS announced an immediate moratorium through end of year on processing new ERC claims amid rising concerns about a flood of improper ERC claims. It stated that hundreds of criminal cases are bring worked and thousands of ERC claims have been referred for audit.
- On October 19th, 2023, the IRS announced a special withdrawal process to help those who filed an ERC claim and are concerned about its accuracy.
The withdrawal option lets employers who filed an ERC claim but haven’t received a refund to cancel their submission and avoid repayment, interest, and penalties. The IRS will acknowledge the withdrawal request and treat the claim as if it were never filed. This process depends on the status of the claim, whether it has been paid, audited, or is still pending. The IRS has provided detailed steps for each scenario on its website. 6
The withdrawal option is not available for claims that have been cashed or deposited, or for claims that involve other adjustments besides the ERC. In those cases, the employer must amend the return and repay any excess credit. The withdrawal option is also not a way to avoid criminal investigation and prosecution for fraudulent claims. The IRS advises employers to consult with a trusted tax professional before filing or withdrawing an ERC claim. 7
Engaging with ERC mills can lead to audits, penalties, and even criminal prosecution by the IRS. Additionally, it diverts funds from genuinely deserving businesses, undermining the purpose of the ERC program.
To ensure you legitimately claim the ERC, follow these steps:
- Get guidance from an experienced tax professional. They can help you navigate the intricate ERC program, determine your eligibility, calculate your credit, and file your claim correctly. They can also advise you on IRS rules and regulations and help you avoid common pitfalls.
- Stay updated by following the IRS guidance on their website, which includes FAQs, worksheets, forms, and instructions to help you with your claim. Keep thorough records of calculations and supporting documents. 5
The ERC is a crucial tax benefit that can support your business. However, it is imperative to remain vigilant and avoid falling prey to ERC mills. By following these guidelines, you can securely and ethically claim the ERC, safeguarding your business' financial future.
1 Employee Retention Credit | Internal Revenue Service. (n.d.). https://www.irs.gov/coronavirus/employee-retention-credit
2 Browning, L. (2022, September 22). A $2 trillion fraud with employee retention credits puts financial advisors on edge. Accounting Today. https://www.accountingtoday.com/news/a-2-trillion-fraud-with-employee-retention-credits-puts-financial-advisors-on-edge
3 AICPA Releases Statement on IRS Announcement Concerning ERC Mills. (n.d.). News | AICPA & CIMA. https://www.aicpa-cima.com/news/article/aicpa-releases-statement-on-irs-announcement-concerning-erc-mills
4 IRS: Employee Retention Credit available for many businesses financially impacted by COVID-19 | Internal Revenue Service. (n.d.). https://www.irs.gov/newsroom/irs-employee-retention-credit-available-for-many-businesses-financially-impacted-by-covid-19
5 Employee Retention Credit Eligibility Checklist: Help understanding this complex credit | Internal Revenue Service. (n.d.). https://www.irs.gov/newsroom/employee-retention-credit-eligibility-checklist-help-understanding-this-complex-credit
6 IRS announces withdrawal process for Employee Retention Credit claims; special initiative aimed at helping businesses concerned about an ineligible claim amid aggressive marketing, scams | Internal Revenue Service. (n.d.). https://www.irs.gov/newsroom/irs-announces-withdrawal-process-for-employee-retention-credit-claims-special-initiative-aimed-at-helping-businesses-concerned-about-an-ineligible-claim-amid-aggressive-marketing-scams
7 Withdraw an Employee Retention Credit (ERC) claim | Internal Revenue Service. (n.d.). https://www.irs.gov/newsroom/withdraw-an-employee-retention-credit-erc-claim