Third-party Promoters Continue to Mislead Business Owners
The Employee Retention Credit (ERC) was a cornerstone of the COVID-19 era relief programs aimed at keeping businesses afloat. But today the IRS is warning business owners to take caution before filing retroactively for the tax credit, which expired in 2021 but is still available to businesses that file amended payroll tax returns to claim it.
As the first deadline for filing retroactively for the ERC approaches in 2024, large numbers of third-party promoters who claim to be tax advisors have begun aggressively pushing business owners to file for the tax credit. Many of these business owners turn out to be ineligible for the credit.
These third-party promoters charge large upfront fees or a fee that is contingent on the amount of the refund. And the promoters may not inform taxpayers that wage deductions claimed on the business’ federal income tax return must be reduced by the amount of the credit. In other words, besides incurring the costs of filing amended payroll tax returns (the Form 941 that is filed quarterly), claimants also must file amended income tax returns for the affected years. If the IRS determines claimants are not eligible for the ERC, they have incurred those filing costs for nothing.
In a recent statement from the IRS, Acting Commissioner Doug O’Donnell said: “Anyone who is considering claiming this credit needs to carefully review the guidelines. If the tax professional they’re using raises questions about the accuracy of the Employee Retention Credit claim, people should listen to their advice.”
O’Donnell added that the IRS is actively auditing ERC claims and is conducting criminal investigations related to false claims.
Why the ERC?
The ERC is a refundable tax credit designed for businesses which continued paying employees while shut down, or which had significant declines in gross receipts from March 13, 2020, to Dec. 31, 2021, due to the COVID-19 pandemic. Eligible taxpayers can claim the ERC on an original or amended payroll tax return (Form 941) for a period within those dates.
To be eligible for the ERC, employers must have:
- Sustained a full or partial suspension of operations due to orders from a governmental authority due to COVID-19 during 2020 or the first three quarters of 2021, or
- Experienced a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021 (as compared to the same quarters in 2019), or
- Qualified as a recovery startup business for the third or fourth quarters of 2021.
ERC Claims Continues
The IRS began warning taxpayers about this ERC scheme last fall but attempts to claim retroactive benefits under the ERC program have continued into the current tax season. The IRS urges business taxpayers to work with experienced tax advisors and not fall prey to third-party promoters who convince them they qualify for the ERC despite not meeting the eligibility criteria. Taxpayers are always responsible for the information reported on their tax returns. Improperly claiming the ERC could result in taxpayers being required to repay the credit along with penalties and interest.
As a reminder, only recovery startup businesses are eligible for the ERC in the fourth quarter of 2021. Additionally, for any quarter, eligible employers cannot claim the ERC on wages that were reported as payroll costs in obtaining PPP loan forgiveness or that were used to claim certain other tax credits (ex. R&D).
To report tax-related illegal activities relating to ERC claims, submit by fax or mail a completed Form 14242, Report Suspected Abusive Tax Promotions or Preparers and any supporting materials to the IRS Lead Development Center in the Office of Promoter Investigations:
Internal Revenue Service Lead Development Center
Stop MS5040
24000 Avila Road
Laguna Niguel, California 92677-3405
Fax: 877-477-9135
If you have been contacted by a third party about your company’s eligibility for the ERC, contact your KRD advisor.
