The IRS is once again warning small-business owners to steer clear of Employee Retention Credit scams, and it's signaling plans to actively audit and pursue criminal investigations for those falsely claiming the tax credit.
The ERC is a potentially lucrative Covid-19 tax credit that could net small-business owners up to $26,000 per employee — a significant total at a time when businesses are grappling with inflation and economic concerns.
But, as one of the last remaining options for Covid-19 relief, the program has become a target for scammers attempting to prey on small businesses.
The IRS initially released a notice about the ERC in 2022, warning small-business owners against potential scams. But the new notice, issued March 7, stresses how aggressive these types of ERC scams have become and how they could leave small-business owners at risk.
"While this is a legitimate credit that has provided a financial lifeline to millions of businesses, there continues to be promoters who aggressively mislead people and businesses into thinking they can claim these credits," said Acting IRS Commissioner Doug O'Donnell.
He said anyone considering claiming the credit needs to carefully review the guidelines and listen to their tax professional if they raise questions about the accuracy of their ERC claim.
"People need to think twice before claiming this," O'Donnell said.
Red flags to watch for with the ERC
The IRS said one potential red flag for businesses is third-parties who are advertising aggressively on the radio or online while charging large upfront fees or fees contingent on the amount of the credit.
The IRS cautioned those third-parties may not inform small-business owners that wage deductions claimed on their federal income tax return are reduced by the amount of the credit.
The agency said businesses need to be cautious of advertised services and direct solicitations regarding the ERC that promise tax savings that sound too good to be true and warned that business owners were responsible for the information on their tax returns — meaning business owners are responsible for any penalties plus interest.
What is the ERC?
The ERC was initially set at 50% of up to $10,000 in qualifying wages per employee for the last three quarters of 2020. The American Rescue Plan Act extended and expanded the ERC to include up to 70% of $10,000 in qualifying wages per employee per quarter in 2021 for the first three quarters, making it much more lucrative to business owners.
How do I qualify for the ERC?
To qualify for the ERC, businesses needed to record a drop in revenue during 2020 and/or the first three quarters of 2021 compared to 2019, or they had to be operating under significant government restrictions, which includes many restaurants, day cares and other businesses.
Companies that qualify in all available quarters could receive up to $26,000 per full-time employee over the entire credit — although that's not common.
If you’re a small business owner, experienced the revenue reductions required and qualify for the credit, your Crown Personal CFO and/or CPA have likely already identified this and taken advantage of it. If you have not, you’re likely receiving many solicitations from companies willing to do the filing for you for a percentage of the credit received. They may refute that it’s not just about revenue reduction and there are other ways they can qualify you for the credit. The companies that file under these exceptions are the ones the IRS is targeting with audits. Be very careful about filing under these exemptions and lean on your CFO and CPA for honest feedback.