On May 25, 2023, the Internal Revenue Service (IRS) alerted businesses to be careful about new scams that focus on the Employee Retention Credit (ERC).

The IRS has been monitoring a "barrage of aggressive broadcast advertising" that seriously misrepresents and exaggerates the qualifications for the Employee Retention Credit. Due to the proliferation of ERC scams, the IRS is increasing its effort both in audits and criminal investigations.

IRS Commissioner Danny Werfel stated, "The aggressive marketing of the Employee Retention Credit continues preying on innocent businesses and others. 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."

The IRS emphasized that the Employee Retention Credit is a legitimate taxpayer benefit. It was created to help businesses with employment challenges during the COVID-19 pandemic.

However, the ERC has been abused. Werfel continued, "This continual barrage of marketing by advertisers means many invalid claims are coming into the IRS, which also means it takes our hard-working employees longer to get to the legitimate Employee Retention Credits. The IRS understands the importance of these credits, and we appreciate the patience of businesses and tax professionals as we continue to work hard to get valid claims processed as quickly as possible while also protecting against fraud."

The IRS emphasizes the improper ERC credits may result in an obligation to pay back the IRS, potentially including penalties and interest. There are several signs to indicate that taxpayers should be wary of ERC promoters.

1. Unsolicited Calls — Promoters will send out millions of calls and advertisements claiming that the ERC is an "easy application process."

2. ERC Eligibility Within Minutes — The promoter claims he or she can determine eligibility in a few minutes.

3. Upfront Fees — Promoters require you to pay a large upfront fee before they are willing to submit your claim to the IRS.

4. Percentage of the Refund — If the promoter desires a percentage of the ERC amount, this is a red flag. You should not hire individuals who provide tax advice based on a percentage of a refund or credit received.

5. Aggressive Claims — Many promoters claim your business will qualify before a review of your tax situation. The truth is that the ERC is a complex credit that applies only to a limited group of businesses.

6. Nothing to Lose — The IRS considers the claim that there is nothing to lose as a "wildly aggressive suggestion" and discourages fraudulent claims for the ERC.

Taxpayers and businesses should be cautious because the promoters follow proven methods but omit requirements for eligibility. They engage in aggressive marketing, send out fake letters claiming to be from non-existent groups such as the "Department of Employee Retention Credit" and will leave out key details. One point to know is that the ERC cannot be claimed on wages that were reported as payroll costs for amounts forgiven under the Paycheck Protection Program.

The best protection is to work with a trusted tax professional. Your local CPA can determine qualification requirements and can file the appropriate tax forms with the IRS. The ERC is available for companies that suffered from a full or partial suspension of operations due to COVID-19 lockdowns during 2020 or the first three quarters of 2021. There is a requirement for a substantial decline in gross receipts. Any recovery startup businesses must have commenced operations during the 3rd or 4th quarter of 2021.

Editor's Note: The IRS advice to trust your local CPA is excellent. A local CPA will be familiar with your business and can determine whether you are qualified to file for the ERC. While Congress allocated billions in government funding in an effort to try to address record levels of unemployment, it is important to be certain you are properly qualified before filing for the ERC.