Employee Retention Credit (ERC) scams surge, IRS issues warning to small business owners

Author: ASBN

At the height of COVID-19’s grip on the United States, Congress passed a series of pandemic-related tax credits to ease the burden on businesses and keep more workers employed. One of those credits is called the Employee Retention Credit (ERC). 

The ERC is a refundable employment tax credit that SMBs can claim if a government mandate entirely or partially shut their business during 2020 or the first three calendar quarters of 2021. Some startup companies and businesses that experienced the required decline in gross receipts during this time period are also eligible.

However, the Internal Revenue Service (IRS) recently warned business owners about potential ERC scams. 

“The aggressive marketing of the Employee Retention Credit continues preying on innocent businesses and others,” said IRS Commissioner Danny Werfel. “Aggressive promoters present wildly misleading claims about this credit. They can pocket handsome fees while leaving those claiming the credit at risk of having the claims denied or facing scenarios where they need to repay the credit.”

Cybercriminals have taken advantage of the lack of clear guidance around this credit, which has been modified three different times since its 2020 introduction. 

ERC scams are most often advertised to business owners as an easy way to capitalize on pandemic-era government assistance. Usually, the scammers will charge fees to assist business owners in submitting ineligible claims for the credit. These scammers disappear long before the IRS can invalidate the claims, and contrary to belief, filing a false claim carries serious consequences. According to the IRS, if a claim is denied, there will typically be interest and penalties along with it. 

So, how can you spot these scams and protect your business? The IRS recommends exercising caution and skepticism when it comes to the following:

• Unsolicited ads, calls, emails, or texts from someone you don’t know.
• Companies that claim they can determine your ERC eligibility within minutes.
• Hefty upfront fees to claim the credit.
• Fees based on a percentage of the Employee Retention Credit refund amount claimed.
• Statements from a promoter that you qualify for the credit before discussing your tax situation.
• Statements from a promoter urging you to submit the claim because there is nothing to lose. 

If you didn’t take advantage of the ERC in 2020 and 2021, there’s still time! Find out how to retroactively receive the ERC credit by filing amended quarterly returns here.