As an early government provision for businesses adversely affected by the COVID-19 pandemic, the Employee Retention Credit (ERC), helped many eligible employers refrain from terminating employees due to diminished wages, which helped those who continued paying employees.
Unfortunately, ineligible enterprises are subject to "assistance", for a fee, from unethical people who claim they can secure tax benefits on behalf of eligible employers. In the end, the assistance fails to materialize, and the fee is gone for good. The Internal Revenue Service (IRS) has notified tax-paying businesses of the Employee Retention Credit scam so that the latter will not fall prey.
What Are ERC Scams?
Since the Employee Retention Credit, a tax credit against the calculated payroll tax burden for Social Security, was instituted as part of the Coronavirus Aid, Relief and Economic Security Act (CARES), unscrupulous actors have exploited the desires of business owners to avoid layoffs.
Seizing on the complexity and qualifications of the credit's rules, according to the IRS, they sell businesses on their services to quickly obtain the benefit for their companies. Of course, many companies do not qualify for the ERC program, and the perpetrators know it. In the end, businesses lose money in exorbitant fees, while swindlers are enriched.
The lesson here is to research such offers thoroughly before agreeing to a service that might be illegitimate and only work with a qualified tax professional to avoid IRS-related phishing attempts.
Red Flags of Employee Retention Credit Fraud
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 really 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. It is imperative that these sales pitches are 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.
How to Avoid an Employee Retention Credit Scam
#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 service 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 the 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 or Processing, Filing, and Receipt of the ERC
This requirement is joined with the mandate that any ERC service should be clear and specific about its payment schedule. Those professing expertise in gaining credit for clients 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.
ERC Help is Available from Reputable Chicago CPA Firm
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.