Employee Retention Credit: Spotting Scams and Ensuring Legitimate Claims

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Is the Employee Retention Credit A Scam?

As businesses navigate the complex terrain of tax credits in the wake of the COVID-19 pandemic, the Internal Revenue Service (IRS) has issued a renewed alert about potential scams surrounding the Employee Retention Credit (ERC). While the ERC is a legitimate tax credit designed to support businesses that continued paying employees during shutdowns or faced a significant decline in gross receipts, aggressive marketing tactics and misleading claims have raised concerns. In this article, we’ll explore what the ERC is, how small businesses, startups, and nonprofits can spot and avoid scams, and the proper procedures for filing legitimate claims.

Understanding the Employee Retention Credit

The ERC, also known as the Employee Retention Tax Credit (ERTC), is a refundable tax credit aimed at businesses that maintained employee payments during the COVID-19 pandemic or experienced a substantial decline in gross receipts. The IRS has acknowledged the legitimacy of the credit but warns of misrepresentation by promoters.

The Threat of Misleading Claims

Aggressive promoters are exaggerating who can qualify for the ERC, leading to potential issues for businesses and tax-exempt organizations. The IRS has increased audit and criminal investigation efforts to counter misleading claims. Businesses considering the ERC need to review official requirements to avoid repercussions from improper claims.

Warning Signs of ERC Scams

To safeguard against scams, it’s crucial to be aware of warning signs associated with ERC marketing:

1. Unsolicited Calls or Advertisements:
   • Be cautious of unsolicited calls or advertisements promising an “easy application process.”
2. Immediate Eligibility Claims:
   • Statements suggesting eligibility determination within minutes are often misleading.
3. Upfront Fees and Percentage-Based Charges:
   • Large upfront fees or charges based on a percentage of the refund amount indicate potential scams.
4. Aggressive Claims without Review:
   • Promoters claiming eligibility before evaluating the business’s tax situation are likely misrepresenting the credit.
5. Misleading Suggestions and False Eligibility Information:
   • Promoters may provide inaccurate information about eligibility requirements, putting businesses at risk.

How ERC Scammers Lure Victims

Promoters use various tactics to lure businesses into applying for the ERC:

1. Aggressive Marketing:
   • Aggressive advertising through radio, TV, online platforms, phone calls, and text messages.
2. Fake Letters and Correspondence:
   • Sending fake letters from non-existent groups to appear official, urging immediate action.
3. Omission of Key Details:
   • Failure to accurately explain eligibility requirements or compute the credit, leading to potential tax problems.
4. Ignoring PPP Participation Rules:
   • Not informing businesses about the ineligibility to claim ERC on wages reported as payroll costs for PPP loan forgiveness recipients.

Protecting Against Improper Claims

To protect themselves, businesses and tax-exempt groups can take the following steps:

1. Work with Trusted Professionals:
   • Collaborate with trusted tax professionals rather than relying on promoters with vested interests.
2. Ensure Legitimate Qualification:
   • Only apply for the ERC if legitimately qualified, and seek advice from trusted tax professionals.
3. Report Suspected Abuse:
   • Report suspected ERC abuse using Form 14242 to the IRS Lead Development Center.

Properly Claiming the ERC

For those eligible for the ERC, it’s essential to follow specific eligibility requirements:

1. Operational Suspension or Gross Receipts Decline:
   • Sustain a full or partial suspension of operations or experience a significant decline in gross receipts due to COVID-19.
2. Recovery Startup Business:
   • Qualify as a recovery startup business for specific quarters of 2021.

As businesses strive to recover from the economic impact of the pandemic, navigating tax credits like the ERC requires vigilance and adherence to legitimate processes. Always be on the lookout for warning signs and try to understand the eligibility criteria to avoid falling victim to scams and ensure the proper claiming of the Employee Retention Credit. If you are overwhelmed just thinking about whether you are eligible, seek professional assistance. At Bookkeeping Confidential, we assist small businesses, startups and non-profits to prepare for tax filing across 50 states. We are certified bookkeepers who focus on increase our client’s profitability and ensure IRS compliance at all times. Need assistance? Book a free non-obligatory consultation to get started.