IRS Urgent Alerts: ERC Scam Warning Signs to Watch For

The Internal Revenue Service (IRS) is cautioning businesses about misleading claims regarding the Employee Retention Credit (ERC). Aggressive marketing tactics are being used to exaggerate who can qualify for the credit, resulting in an influx of invalid claims. 

This creates challenges for the IRS in processing legitimate claims and increases the risk of fraud. This article aims to provide: 

• A comprehensive understanding of the ERC, 
• Highlight the warning signs of aggressive marketing, 
• Explain how promoters lure victims, 
• Offer tips for protecting businesses, and 
• Outline the proper procedure for claiming the ERC.

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Understanding the Employee Retention Credit

The Employee Retention Credit, also known as the ERC or ERTC, is a legitimate tax credit designed to provide financial assistance to businesses affected by the COVID-19 pandemic. 

It is intended for businesses that either continued paying employees while being shut down due to government orders or experienced a significant decline in gross receipts during specific eligibility periods.

The IRS has allocated additional resources to handle ERC claims. However, the influx of invalid claims resulting from aggressive marketing makes it challenging for the IRS to process valid claims promptly. 

Therefore, it is crucial for businesses to understand the official requirements to avoid penalties and ensure a smooth application process.

Warning Signs of Aggressive ERC Marketing

Businesses need to be vigilant and aware of the warning signs that indicate aggressive ERC marketing tactics. Some key red flags to watch out for include:

1. Unsolicited calls or advertisements promoting an "easy application process."
2. Claims that ERC eligibility can be determined within minutes.
3. Demands for large upfront fees to claim the credit.
4. Fees are based on a percentage of the refund amount claimed, which is similar to a warning sign for average taxpayers.
5. Aggressive claims that a business qualifies for credit without evaluating the individual circumstances of the employer. The ERC is a complex credit that requires careful review before applying.
6. Misleading statements suggest there is nothing to lose by submitting a claim. In reality, improperly received credits may need to be repaid along with penalties and substantial interest.
7. Promoters may lie about eligibility requirements, putting businesses at risk of having their identity stolen or their credit improperly claimed by someone else.

Tactics Employed by Promoters

Promoters use various strategies to lure businesses, tax-exempt groups, and others into applying for the ERC. These tactics include:

1. Aggressive Marketing: Promoters engage in relentless marketing campaigns across radio, television, online platforms, phone calls, and text messages.
2. Direct Mailing: Some promoters send fake letters resembling official IRS correspondence or government mailings. These letters urge immediate action and may appear to come from non-existent groups such as the "Department of Employee Retention Credit."
3. Omission of Key Details: Third-party promoters often fail to accurately explain eligibility requirements and how the credit is computed. They may make broad claims that all employers are eligible without considering individual circumstances. For example, they may neglect to mention that only recovery startup businesses are eligible for the ERC in the fourth quarter of 2021.
4. Payroll Protection Program (PPP) Participation: Many promoters neglect to inform employers that they cannot claim the ERC on wages reported as payroll costs if they have obtained PPP loan forgiveness.

Protecting Businesses from Improper ERC Claims

To protect themselves from falling victim to improper ERC claims, businesses should follow these essential steps:

1. Work with a Trusted Tax Professional: It is crucial to collaborate with a trusted tax professional who can provide accurate guidance and help navigate the complexities of the ERC. Promoters may prioritize their own financial gain rather than the best interests of those applying for the credit.
2. Verify Eligibility: Before applying for the ERC, businesses should thoroughly understand the eligibility requirements outlined by the IRS. The official guidelines are available on the IRS website, and seeking advice from a trusted tax professional is recommended.
3. Reporting Abusive Promotions: To report ERC abuse or suspected fraudulent activities, individuals can submit Form 14242, Report Suspected Abusive Tax Promotions or Preparers, to the IRS Lead Development Center. This form should be accompanied by any supporting materials and can be mailed or faxed to the designated address.

Properly Claiming the ERC

Properly claiming the ERC requires businesses to meet specific eligibility requirements and follow the correct procedure. The eligibility criteria include:

1. Sustained Suspension of Operations: Businesses must have experienced a full or partial suspension of operations due to government orders limiting commerce, travel, or group meetings because of COVID-19. This applies to the specified periods in 2020 or the first three quarters of 2021.
2. Significant Decline in Gross Receipts: Businesses must have experienced a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021 compared to the same period in the previous year.
3. Recovery Startup Business: For the third or fourth quarters of 2021, recovery startup businesses may be eligible for the ERC. However, specific criteria must be met to qualify.

To claim the ERC, businesses should follow these steps:

1. Review Eligibility: Thoroughly review the eligibility requirements provided by the IRS to ensure qualification for the credit. This includes understanding the specific criteria for each eligibility category.
2. Accurate Computation: Calculate the ERC accurately based on eligible wages paid between March 13, 2020, and December 31, 2021. This calculation may require amending tax returns or including the credit on original employment tax returns.
3. Submission Process: File the appropriate tax forms, such as Form 941, Employer's Quarterly Federal Tax Return, or Form 943, Employer's Annual Federal Tax Return for Agricultural Employees. Include the ERC on the respective form for the applicable period.
4. Documentation: Maintain proper documentation to support the ERC claim, including records of eligible wages, periods of suspension or decline in gross receipts, and any other required documentation specified by the IRS.

Conclusion

Businesses should remain cautious of misleading claims and aggressive marketing tactics surrounding Employee Retention Credit. 

Understanding the official requirements, working with trusted tax professionals, and reporting any suspected fraudulent activities are vital steps in protecting businesses from improper claims and potential penalties. 

By following the proper procedure for claiming the ERC, businesses can ensure compliance with IRS guidelines and receive the financial assistance they are entitled to during these challenging times.