Beware of Third Party Employee Retention Credit Vendors

Recently, the IRS issued a warning to employers to be wary of Employee Retention Credit scams and third parties who are advising them to claim the Employee Retention Credit (ERC) when they may not truly qualify.

The ERC was established nearly three years ago as part of a larger COVID-19 relief package to help businesses get through the pandemic, but recently, the IRS has noticed community concern regarding the rise of non-CPA firms taking aggressive positions to claim ERC, along with other CARES Act Employee Retention Credit scams, in 2023.

The companies often submit claims on behalf of businesses based on “supply chain disruptions” or other non-quantitative criteria, while charging large upfront fees or fees that are contingent on the refund amounts. These claims, if later audited by the IRS, may be disallowed which would require the money to be paid back along with possible penalties and interest.

HOW DO I KNOW IF MY BUSINESS IS ELIGIBLE?

You can visit IRS.gov to learn more about eligibility requirements and how to claim the Employee Retention Credit. Here is a brief overview of the main requirements:

To be eligible for the ERC, employers must have:

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

As a reminder, only recovery startup businesses are eligible for the ERC in the fourth quarter of 2021. Additionally, for any quarter, eligible employers cannot claim the ERC on wages that were reported as payroll costs in obtaining PPP loan forgiveness or that were used to claim certain other tax credits.

We also recommend reviewing this resource by the Association of International Certified Professional Accountants (AICPA): Employee retention credit: Fact or fiction? It provides answers to common questions and various business scenarios as well as highlights some of the misconceptions surrounding the credit. To download it, click here.

Employee Retention Credit Scams: A Growing Concern

With the introduction of the CARES Act, scams targeting the Employee Retention Credit have surged. Posing as tax experts or officials, scammers often mislead businesses about their ERC eligibility, charging fees for false assistance. The allure of maximizing tax credits has also been exploited, with scammers providing deceptive documentation or information. As 2023 unfolds, businesses should be wary of new Employee Retention Credit scams. Staying informed and consulting trusted tax professionals is essential to avoid falling prey to these scams.

HOW SHOULD I REPORT A FALSE CLAIM?

To report tax-related illegal activities relating to ERC claims, submit Form 3949-A, Information Referral. You should also report instances of Employee Retention Credit scams, fraud and IRS-related phishing attempts to the Treasury Inspector General for Tax Administration at 800-366-4484.

HOW CAN KATZABOSCH HELP?

If you have questions about what ERC best practices and business strategies apply to your organization’s situation, please contact us. Our dedicated PPP and ERC teams are well-versed in the latest guidance and can help you achieve the best possible long-term benefit to your business.

FAQ on Employee Retention Credit and Associated Scams

What is the Employee Retention Credit (ERC)?

The ERC was established as part of a COVID-19 relief package to assist businesses during the pandemic. It’s been in place for nearly three years.

What concerns have arisen in 2023 regarding the ERC?

There’s been a rise in non-CPA firms aggressively claiming the ERC and other CARES Act Employee Retention Credit scams. These companies often base their claims on vague criteria like “supply chain disruptions” and charge significant fees.

What risks are associated with these aggressive claims?

If the IRS audits and disallows these claims, businesses may have to repay the money, with added penalties and interest.

How can I determine if my business qualifies for the ERC?

Visit IRS.gov for detailed eligibility requirements. In summary, eligibility is based on operational suspensions due to COVID-19, significant declines in gross receipts, or qualification as a recovery startup business in specific quarters of 2021.

Are there any restrictions on claiming the ERC?

Yes, only recovery startup businesses can claim the ERC in the fourth quarter of 2021. Also, the ERC cannot be claimed on wages reported as payroll costs for PPP loan forgiveness or used for certain other tax credits.

Where can I find more information about the ERC?

The Association of International Certified Professional Accountants (AICPA) offers a resource titled “Employee retention credit: Fact or fiction?” which answers common questions and clarifies misconceptions.

How have scams related to the ERC evolved?

With the CARES Act’s introduction, there’s been a surge in scams targeting the ERC. Scammers, posing as tax professionals, mislead businesses about their eligibility and charge fees for false services.

How can I report a fraudulent ERC claim?

To report illegal tax-related activities concerning ERC claims, use Form 3949-A, Information Referral. Report any ERC scams or IRS-related phishing attempts to the Treasury Inspector General for Tax Administration at 800-366-4484.

How can KatzAbosch assist with ERC-related concerns?

KatzAbosch has dedicated PPP and ERC teams knowledgeable in the latest guidance. They can provide advice on best practices and strategies tailored to your business’s situation.