Responding to shutdowns and reductions in force to which many businesses had to resort as the COVID-19 pandemic raged, the U.S. government implemented, among many mitigating measures, the Employee Retention Credit (ERC), which is a refundable tax credit towards payroll tax obligations that enabled qualified companies to continue paying employees. Sadly, unscrupulous parties have since misrepresented themselves and their job title as agents who can secure employee retention credits on behalf of interested businesses. According to the Internal Revenue Service (IRS), they mislead ineligible firms and then take their money. Companies need to be wary of such ERC scams and others promising tax credits on wages paid.
In the late winter/early spring of 2020, the U.S. government initiated a wide range of measures to stabilize the economy in legislation known as the Coronavirus Aid, Relief and Economic Security Act (CARES). Later, the government approved the consolidated appropriations act. Among the assistance provided to mortgagees, tenants, and displaced workers was the Employee Retention Credit. Businesses that were forced to terminate operations or otherwise cut back severely, by government fiat or prevailing conditions, were encouraged to maintain payouts of salaries and qualified wages. In exchange, the IRS would issue a tax credit against the firm's payroll tax obligation.
Unfortunately, offers of assistance began popping up, inviting businesses to retain consultants, for a fee, who would help file the necessary paperwork to obtain the credit. Many of the targeted businesses were not eligible for ERC yet, for example, those without enough gross receipts or those who didn't experience supply chain disruptions, paid the predatory agents for the service. Since these businesses did not meet the threshold as an eligible employers for declining revenue, nor were they subject to a government order to cease or shrink operations, they never qualified for ERC. Still, the fee was non-refundable.
Illegitimate ERC Consultants
Some employee retention credit scams are perpetrated by people with little or no knowledge of the tax codes much less the employee retention credit. Slick marketing on their part, and wishful thinking on the part of their victims, can lead to a loss of money in exchange for an ERC rejection by the IRS. Make sure to check out their credentials carefully.
Submitting Erroneous Eligibility Claims
As noted above, ERC eligibility is defined narrowly. Simply losing revenue during COVID may not qualify your small business. Likewise, the criterion of a government-ordered closure must be fully and legitimately documented. Without strong evidence of either, the IRS may reject your claim despite what the scammers tell you. Independent research will serve business owners well in this regard since an air of casual confidence is a hallmark of scam artists.
ERC claims are especially vulnerable to identity theft. Posing as tax advisors, the thieves can collect confidential information about you, your business, and your financial holdings. Since the IRS requests such detailed data, these scammers can make believable appeals.
Filing False Claims
Particularly brazen cheaters will deliberately enter untrue information on the paperwork when making an ERC claim on your behalf. This exposes you and your business to all sorts of liability and penalties. Businesses are well advised to examine the documentation before anything is sent to the federal government. A false tax claim is a fraud under the law. Unfortunately, the victim is responsible while the scammer often gets away.
Presenting Fake Employee Data
The IRS formulates the employee retention credit according to what each employee receives in compensation and, significantly, how many employees work for the company. Creating phantom employees to enlarge the credit is a common trick for ERC scammers. Just remember, the government can verify all submitted information if need be. In this case, you want to be sure there are no unauthorized additions to the staff.
Exaggerating Salaries and Wages
In the same vein, crooked con artists might also fatten the wage figures of your employees to yield a larger credit, on paper, anyway. In doing so, they will ask for a larger fee. Again, you run a high risk when falsifying payroll figures to the IRS so it is best to review, whether or not you trust the agent assisting you.
Seeking ERC Credits for Disqualified Employees
It is a fact that not every employee can count toward ERC refunds. For example, a company may have downsized operations but left a core staff in place during the pandemic. Those who continued to work and produce uninterrupted might not qualify for the ERC calculations. Some of these situations are borderline so being cautious about counting them is advisable. One sign of an ERC scammer is that no such restraint is ever exercised.
The CARES Act Employee Retention Credit scam is a product of entities known as "ERC mills". These came to the attention of the U.S. Treasury Department and IRS, which noted over 11,000 suspect tax returns claiming the ERC. In combing through these dubious filings, analysts at the IRS discovered several red flags that most of them shared in common:
- Marketing materials that make assurances without having any information on the businesses they were soliciting - how can they be sure without talking to you or your accounting professionals?
- Proposals to file your return, even when your company outsources the payroll - again, a sign of ignorance from a service that should know better.
- Projections of refund figures that are greater than the total payroll - they are counting on an emotional response before reason sets in.
- Premature determinations of eligibility independent of information on company structure, workforce, and circumstances - this indicates they do not care whether your company is eligible or not.
- Fees are based upon high and optimistic percentages of recovered taxes - true professionals make conservative estimates.
Again, each of these warning signs might be explainable by itself. Collectively, they indicate serious trouble ahead. These sales pitches must be investigated and corroborated. Otherwise, far from improving your net financial health, you might end up paying penalties to the IRS or even possibly face jail time or a partial suspension of your business.
#1: Look for a Company that Is Seasoned and Established
An only recovery startup business, by its very nature, does not plan to be around for very long. Its focus is narrow and, in all likelihood, its mission is short-term profit off businesses that may not qualify.
An ERC scam has a greater probability of emanating from such an enterprise. To be sure, there are new businesses that are ethical and professional that help employers with the IRS. Nevertheless, many are conducting ERC tax credit scams, looking for unsuspecting employers.
If a serious determination of eligibility, and a competent execution of an ERC claim, is what you want, better to opt for well-trained and seasoned tax professionals with a long track record of customer results and legal compliance with the IRS. The Lewis CPA firm has performed expert accounting and tax services for over 35 years and can help you avoid interest and penalties.
#2: Confirm that the Company Provides You with Concrete Evidence of ERC Eligibility
As indicated above, a red flag for bad actors is the promise of free money or a credit or refund without sufficient knowledge of your company. Certain criteria must be satisfied for a business to attain eligibility for an ERC credit. These relate to the connections between significant declines in cash flow and the pandemic, quarterly totals in terms of salaries and wages, and calculated compensation for individual employees.
If the outfit proposing to do the legwork, paid legwork, cannot connect the dots among gross receipts, wages paid, and the employee retention credit, you should take a pass on such a company.
#3: Insist on Personal Communication by Telephone or Face-to-Face
Incompetence and ill motives are easier to hide through communication exclusively conducted in the cyber-sphere. Personal conversations provide for immediate follow-up and clarification.
Those promoting advertised schemes are exposed through this direct form of personal exchange. Refusal to do business this way should mark any direct solicitations as suspicious. In addition, it demonstrates that the promoter wants to keep its physical location concealed in the inevitable event that the ERC claim is rejected after the fee is paid.
#4: Inquire about Defense Against IRS Audits
ERC claims lose their gratification when the Internal Revenue Service decides to audit your payroll information or payroll tax returns. Legitimate accountants and tax preparers are there for their customers if the agency finds fault with a filing after the fact.
For the scammer, any penalties incurred from a bad claim or poor preparation are the customer's problem. Accordingly, a business owner will get no assurance of audit assistance from shady ERC credit fraud practitioners who claim to be experts in ERC audits.
#5: Require a Clear Explanation of How the Service Gets Paid
How does a soliciting service receive its compensation? In other words, when does it collect its fees? When the ERC claim is filed? Half after filing and half upon receiving the credit? Or none until the credit is documented and applied? The answers to these questions separate those who engage in improperly claiming they are legit from more trustworthy tax advisors.
The means of payment also matters. Are their services enumerated on a valid invoice or lumped together as one item? Are they demanding payment be wired to a third party? These are often the earmarks of bad actors who are looking to commit ERC fraud against the IRS and small businesses.
#6: Make Them Explain Why They Are Qualified to Claim the Employee Retention Credit
If an organization promises taxpayer eligibility for the ERC, it should very well articulate its credentials and prior success in this endeavor. Require specificity of their representatives.
Do they bear any testimonials, verifiable ones, regarding their effectiveness in helping with business filing? Have any of their personnel worked for or with the IRS or another government agency? What comprises the education and training of their staff? What is the percentage of wins versus losses? What certifications and licenses do they hold?
Many scammers talk about a good game but retreat when evidence is asked of them.
#7: Does the Service Have a History of Favorable Outcomes?
Those who deal honestly should be able to admit losses, but should also claim many more victories, especially when working with customers and their taxes. When failing to achieve the stated objective, a tax professional should conduct a thorough post-mortem, the lessons from which should lead to the avoidance of costly errors in the future. Potential clients should feel no awkwardness about vigorously pursuing matters of accomplishment and defeat.
#8: Learn the Standards to Qualify for ERC before Signing Any Agreements
Eligibility to receive this tax benefit rests on several variables and calculations, but any owner who is trusting others to file for the Employee Retention Credit needs to know the basic eligibility requirements:
- Applications are made for quarters (three months) during 2020 and 2021.
- You must be an entity that was restricted from doing commercial activity by statute, ordinance, or executive order.
- Alternatively, your company must demonstrate significant declines in revenue during this time.
Knowing these lessens the possibility of errors in the information reported to the IRS.
#9: Press for a Realistic Time Frame for Processing, Filing, and Receipt of the ERC
This requirement is combined with the mandate that any ERC service be clear and specific about its payment schedule. Those professing expertise in gaining client credit should have no trouble with at least ballpark estimates of how long it will take to realize tax savings.
#10: Ask Whether the ERC Company Finances the Credit ahead of Receipt from the IRS
Many tax preparation services will arrange for an immediate refund for customers who have an unmistakable refund or refundable tax credit due. The customer simply authorizes the monies to go to the preparer when the Internal Revenue Service finally issues them. Meanwhile, the prep service advances the funds to the customer. Any ERC business that lacks the means to do this is worth additional scrutiny.
Do not wait for a letter from the IRS if you have been scammed. Be proactive and reach out to the agency.
1. Notifying the Inspector General for Tax Administration at the Department of the Treasury, the parent department of the IRS, is a good resource, especially when the scammers present themselves as Internal Revenue Service representatives. This official can be reached at (800) 366-4484.
2. All suspicious emails go to [email protected].
3. In addition, you can file a complaint against the scammer with the Federal Trade Commission (FTC) by visiting ftc.gov/complaint. Filing a complaint is quick and easy and will go a long way in protecting others from the same fate.
4. Meanwhile, move to protect your assets. Call your financial institutions to change account numbers, passwords, and security questions. Do this immediately to avoid any problems.
5. Run a new credit report immediately. It might also be wise to place a fraud alert on your report in case the scammer is trying to obtain credit using your information.
6. Importantly, stay abreast of the latest patterns of illicit schemes that target businesses. That will help you avoid issues in the first place.
If you suspect your small business is eligible for the ERC benefit, avoid direct solicitations and choose a firm well-regarded in tax accounting and representation. The Chicago-based Lewis CPA firm represents professionalism, ethics, and customer service with ERC claims. Contact us today for superior ERC consulting.