Employee Retention Credit (ERC) scams are so prevalent that the Internal Revenue Service (IRS) recently announced an immediate moratorium through at least the end of the year on processing new claims....

Employee Retention Credit (ERC) scams are so prevalent that the Internal Revenue Service (IRS) recently announced an immediate moratorium through at least the end of the year on processing new claims. According to the IRS, a substantial share of new claims for the pandemic-era program are ineligible due to small businesses being scammed by aggressive promoters and marketing.

"For those people being pressured by promoters to apply for the Employee Retention Credit, I urge them to immediately pause and review their situation while we look to add new protections and safeguards to stop bad claims from ever coming in," IRS Commissioner Danny Werfel said in a press statement. "In the meantime, businesses should seek out a trusted tax professional who actually understands the complex ERC rules, not a promoter or marketer hustling to get a hefty contingency fee. Businesses that receive ERC payments improperly face the daunting prospect of paying those back, so we urge the utmost caution. The moratorium will help protect taxpayers by adding a new safety net onto this program to focus on fraudulent claims and scammers taking advantage of honest taxpayers."

ERC Scams

The Employee Retention Credit is a refundable tax credit designed for businesses that continued paying employees during the COVID-19 pandemic while their business operations were fully or partially suspended due to a government order or they had a significant decline in gross receipts during the eligibility periods. Eligible businesses can claim a refundable tax credit against the employer share of Social Security tax equal to 70% of the qualified wages they pay to employees after December 31, 2020, through June 30, 2021.

The ERC is a complex claim with precise requirements that can be challenging to navigate, especially for small businesses. Many entities took advantage of this to aggressively promote the credit and make false promises of tax savings to those who are ineligible.

According to the IRS, below are several red flags that suggest you could be the target of an ERC scam:

  • Unsolicited calls or advertisements mentioning an "easy application process."
  • Statements that the promoter or company can determine ERC eligibility within minutes.
  • Large upfront fees to claim the credit.
  • Fees based on a percentage of the refund amount of Employee Retention Credit claimed. This is a similar warning sign for average taxpayers, who should always avoid a tax preparer basing their fee on the size of the refund.
  • Preparers seeking anonymity by refusing to sign the ERC return being filed by the business as well as supplying their identifying information and a tax identification number. Similar to "ghost preparers," this limits the risk to just the taxpayer claiming the credit.
  • Aggressive claims from the promoter that the business receiving the solicitation qualifies before any discussion of the group's tax situation. In reality, the Employee Retention Credit is a complex credit that requires careful review before applying.
  • Unscrupulous promoters may lie about eligibility requirements, including refusing to provide detailed documents supporting their computations of the ERC. While scammers tell employers that applying for the tax credit is "risk free," the truth is that employers who improperly received the credit could have to repay it, along with substantial interest and penalties.

What's Next?

IRS auditors are currently examining ERC claims posing the greatest risk. Additionally, the IRS Criminal Investigation division is actively working to identify fraud and promoters of fraudulent claims for potential referral for prosecution to the Justice Department.

Payouts for ERC claims will continue during the moratorium period but will proceed more slowly given the IRS's detailed compliance reviews. According to the IRS, existing ERC claims will go from a standard processing goal of 90 days to 180 days – and much longer if the claim faces further review or audit. The agency may also require additional documentation from the taxpayer to ensure it is a legitimate claim.

Going forward, the IRS is working on new initiatives to help businesses who fell victim to scammers. The agency plans to enact a settlement program later this fall that will allow businesses to repay ERC claims, while avoiding penalties and future compliance action. The IRS is also finalizing the details of a special withdrawal option for those who have filed an ERC claim but the claim has not been processed. According to the IRS, the option, which will be available to taxpayers whose claim hasn't yet been paid, will allow the taxpayers to avoid possible repayment issues and paying promoters contingency fees.

Key Takeaway

The ERC is a complex tax credit program with strict eligibility requirements. Given the significant risk of fraud, businesses should work with experienced professionals to determine the eligibility for the tax credit.

If you believe that may have already fallen victim to an ERC tax fraud scheme, it is also important to take prompt action. At Scarinci Hollenbeck, our dedicated tax attorneys can work with you to determine the best course of action to limit your losses.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.