Business Owners – Beware of Employee Retention Credit Scam
Business owners beware, you could become the victim of a new scam. Here is what you need to know.
This new scam involves the Employee Retention Credit. The Employee Retention Credit (ERC) was created to encourage businesses to keep paying their employees during the Covid-19 Pandemic.
Recently, the IRS issued a warning that third-party businesses are telling employers that they need to claim their Employee Retention Credit. What is the problem with that? Well, many of these businesses do not qualify for the ERC.
What is the Employee Retention Credit?
The ERC is a refundable tax credit for businesses that kept paying their employees while shut down during the pandemic. Businesses that had large declines in their profits from March 13, 2020 – December 31, 2021, may also be eligible.
If your business is eligible, you can claim the ERC either on an original return or an amended return (if you have already filed an original return) for the correct tax period.
What Employers are Eligible for the ERC?
To be eligible for the ERC:
- The employer must have fully or partially suspended operations due to orders from a governmental authority as a result of Covid 19. This suspension of operations must have taken place during 2020 or the first three quarters of 2021.
- The employer must have experienced a large profit decline during 2020 or the first three quarters of 2021.
- The employer qualified as a recovery start-up business in either the third or fourth quarters of 2021.
How to Protect Yourself
You may receive voicemails or emails telling you that you are eligible for the ERC and promising a large payout for you. Keep in mind that many businesses simply don’t qualify for the credit at all. Here are some other red flags to be aware of.
RED FLAG: If the company reaching out to you is making promises without having access to your financials, that is a huge warning sign. Also, offers where the company claims you will get a refund that is larger than your total payroll.
ANOTHER RED FLAG: The company states that you will pay a fee based on a percentage of the recovery. IRS generally advises taxpayers to practice caution when dealing with tax professionals who base their fees on the size of the expected refund. This is because an incentive is created for the tax professional to falsely enlarge numbers to make more money for themselves.
The bottom line is if something seems too good to be true, it probably is. You are ultimately responsible for the information reported on your tax returns. Fraudulently claiming the ERC, even if you were advised to do so by a 3rd party company, will result in you having to repay the credit plus either 20% or 75% penalties, plus interest.
If you are approached by one of these companies, discuss what they are claiming with your tax lawyer before you take any other steps. Or even better, ask your tax lawyer to help you receive the credit.
If you suspect you have already been a victim of a scheme like this, you will need legal advice. Reach out to your tax attorney for assistance. You should also report this fraud to the IRS.