Heightened Scrutiny, Increased Risks With the Employee Retention Credit (ERC)

An employee retention credit (ERC) claim could seem like a quick way to bring in extra money for your business. If you’re considering filing such a claim, however, the Internal Revenue Service (IRS) is watching — closely.

While the ERC is still a legitimate tool to help your business, requirements are narrow and the IRS is cracking down on abuse. Here’s what you need to know to avoid becoming a target for investigation.

How the ERC rescued businesses

First introduced via the CARES Act in 2020, the ERC provided a refundable tax credit against Social Security taxes or the Railroad Retirement Tax. To be eligible, a business either had to have operations fully or partially suspended by a COVID-19 governmental order or have gross receipts less than 50% of those for the same quarter the previous year. These guidelines — and the percentages and dollar amounts of the credit — were modified twice in 2021 under two separate pieces of legislation.

The ERC was a lifesaver for businesses during the COVID-19 pandemic. By helping business owners avoid layoffs, they played a crucial role in economic recovery. And while the IRS had issued specific requirements for eligibility and the process of filing, they weren’t overly vigilant in enforcing them due to the backlog of claims.

This time also saw an uptick in disreputable firms offering ERC claim filing services. Taking an aggressive approach, they advertised unrealistically quick results and used methods that might not be in line with IRS rules. Normally that would put you at risk for an audit. But again, that backlog meant the IRS was less likely to ask you about it.

What has changed?

That backlog we mentioned? It’s been cleared. That means the IRS has more time to scrutinize ERC claims. Audits and even criminal investigations have increased — both on the businesses filing these claims and the questionable firms performing this service for them.

What hasn’t changed, however, are the practices of those less-than-scrupulous providers. These firms are still out there, hoping for businesses in need of quick cash to reach out to them. They often market aggressively using phone calls, texts, and radio/TV/online advertising. Some even send direct mailings (remember those?) that look like official government letters. However, they’ll leave out crucial information like qualifying criteria for the ERC, rules on filing or how it’s calculated. They often charge large fees up front, or fees based on your potential return size. And of course, you’ll need to “act now” to take advantage.

Hiring these firms can result in more than broken promises of large credit amounts delivered quickly. If the IRS finds your claims to be fraudulent, you’ll be required to pay them back (often with interest and penalties).

Want to file an ERC claim? Know the essentials.

The ERC is still a viable tax-savings tool you can use for your 2020 and 2021 business payroll tax returns. The deadline to file for an ERC claim is April 15, 2024, for a 2020 claim and April 15, 2025, for a 2021 claim.

The first step in avoiding an ERC-triggered investigation is to know the rules. According to the IRS, most employers can claim the ERC for qualified wages paid between March 13, 2020, and Dec. 31, 2021. This claim must be on an original or amended employment tax return. However, you must meet one of the following scenarios:

• Your business sustained a full or partial suspension of operations due to orders from an appropriate governmental authority limiting commerce, travel or group meetings because of COVID-19 during 2020 or the first three quarters of 2021.
• Your business experienced a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021.
• Your business qualified as a recovery startup business  or the third or fourth quarters of 2021.

If you believe your business meets these requirements, be vigilant when choosing someone to help you file an ERC claim. Most will not specifically advertise this service, and they’ll tell you if you’re mistaken on whether you qualify. You should also request a thorough worksheet and description of why they believe you qualify and how they calculated the amount you’re due. The IRS has also created a questionnaire, Form 14242, to report firms engaging in ERC abuse.

In short… perform good due diligence when considering an ERC claim. You can also contact the business tax professionals at James Moore if you have questions about your situation.

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