The IRS warns employers to be careful when engaging with companies claiming to help secure Employee Retention Credits (ERC).
Companies the IRS deems “ERC mills” are advising employers to make claims based on extremely questionable qualifications. These bad actors often inform employers they qualify for the credit with little or no information regarding the individual circumstances.
Many of these “ERC mills” charge a large fee upfront contingent on the employers’ refund amount. They often fail to discuss the cash flow impact on the business as well. Due to delayed processing times at the IRS refunds can take six months to process.
How the Scam Works
An employer receives a flyer in the mail claiming they are missing out on $33,000 per employee. Based on employee records, the employer is told they qualify for a credit amount of $1,000,000. The fee is then based on the amount calculated.
In these cases, the company may engage the “ERC mill” to do the project, pay the project fee, and then wait months and months for the refund checks. The IRS will likely also review ERC refunds after the credit claim is initially paid. If the claim is invalid, the company must pay the ERC back, plus penalty and interest.
Improper Return Credit Value
Another key disclosure often left out of the ERC sales pitches is the need to deduct the credit amount from qualified wages claimed on a federal income tax return. They will structure their fees as a portion of the credit amount without deducting this key portion so clients are left with significantly less value.
For example, if an employer is taxed at the standard 21% corporate rate, they only effectively keep $790,000 of the credit $1,000,000 amount mentioned above, losing $210,000 of the benefit while paying fees on the amount paid in taxes.
ERC Mill “Guarantees”
Some companies offer these services at up to a third of the (potentially) inaccurately identified credit amount. Between the fees and tax increases, the net benefit might only be half as much as the initial letter promises.
Even though many ERC mills also provide guarantees about the quality of their services, there is no guarantee the company will be around for several years if the claim is audited. So, in the end, you might end up on the hook for their fee even if you do not get your ERC or need to pay it back based on the results of an audit.
Where to Watch Out for Scams
Taxpayers might receive solicitations from these bad actors in a number of ways. Most commonly, they have been emailed solicitations claiming huge potential credit amounts. They are also coming through phone, voicemail, or text message. Mailers that look like official IRS notices are becoming more common, in addition to web ads, TV commercials, and even radio advertisements.
Keep an eye out for red flags like refund numbers higher than your total payroll, claims you are eligible before any information on your business has been provided, and fees that are a portion of the total refund amount.
Penalties and Fines
Be aware of any tax savings that seem too good to be true. The IRS plans to review these claims closely and as of summer 2022 was working to develop efficient ways to identify fraudulent or non-compliant claims. Taxpayers are responsible for the information reported on their tax returns and falling prey to an ERC scam could leave you with the bill. If you have improperly claimed the ERC, you may be required to repay the credit along with penalties and interest. You’ll also need to re-amend your tax return.
Basics of the Employee Retention Tax Credit
The Employee Retention Credit (ERC) rewards employers that kept employees on their payroll during the COVID-19 impacted months in 2020 & 2021. This is a fully refundable payroll tax credit for eligible wages paid to employees during a qualifying period. Eligible employers can claim a 70% credit on up to $10,000 in qualified wages per employee in eligible quarters in 2021, and 50% credit on up to $10,000 in 2020. Legislation makes this credit available even if you received a PPP loan. While not everyone will qualify, those that do will feel a significant impact from this valuable payroll tax credit.
To claim the ERC the process is as follows:
- Determine if the company is an Eligible Employer
- Determine if the company paid Qualified Wages
- Calculate the credit amount on an employee-by-employee basis
- Claim the credit through a refund using the payroll tax system
Our ERC team recently hosted a webinar on claiming the credit in 2022. To learn more about why there isn’t a huge rush to claim this credit, what the timeline of the ERC is, and if you might be eligible, please watch the webinar or reach out to our team.
What Do I Do if I Was a Victim of an ERC Scam?
If you believe you may have improperly filed your ERC, we highly recommend you speak to a qualified professional to learn more about your options. If you know that your ERC was filed without deducting qualified wages, you will likely need to file an amended income tax return to correct overstated wage deductions.