The IRS rolled out a first look at this year’s Dirty Dozen, and there’s a new—but not surprising—entry: improper claims involving Employee Retention Credits, or ERC.
The “Dirty Dozen” is an annual list of common scams taxpayers may encounter during the year. Many of these schemes peak during tax filing season as people prepare their returns or hire someone to help with their taxes. The scams and schemes put taxpayers and tax professionals at risk of losing money, personal information, data, and more.
Ineligible ERC Claims
This year, the IRS is highlighting Employee Retention Credits following what they call “blatant attempts by promoters to con ineligible people to claim the credit.” The IRS specifically called out schemes from promoters who have been blasting radio and internet ads touting ERC refunds. These promotions can be based on inaccurate information related to eligibility for and computation of the credit.
Taxpayers and tax professionals have reported more personal contacts touting the ERC, including through email and phone calls. As if right on cue, as I was writing this story, I got such a call. They advised:
Hi, this is Michael. I’m calling to let you know that if you’re a business owner who had W-2 employees during 2020 and 2021, you could be eligible for up to $26,000 per employee wage in business funding because of new business tax credits this year. There are still substantial business funding available through the employee retention tax credit for businesses who had W-2 staff in 2020 and 2021. To find out more information and how you qualify call…
It’s not a certainty that this particular call—one of many solicitations I’ve received—was related to a scam. Not all of these calls involve bad actors. Still, IRS Commissioner Danny Werfel warns, “The aggressive marketing of these credits is deeply troubling and a major concern for the IRS.”
Werfel says, “Businesses need to think twice before filing a claim for these credits. While the credit has provided a financial lifeline to millions of businesses, there are promoters misleading people and businesses into thinking they can claim these credits. There are very specific guidelines around these pandemic-era credits; they are not available to just anyone.”
Despite that warning, taxpayers are receiving pitches suggesting otherwise. Another email advised:
Good morning! I wanted to reach out and let you know that **** qualifies for the ERC funding grant program available for 2020 & Q1-Q3 of 2021. ERC is a refundable tax credit that you should apply for and get up to $26,000,00 per employee.
While the email sounds confident that the business would qualify, that specific company has not been operational for years.
Another email solicitation took a different tack, writing:
Hope you had a great weekend! It looks like someone from our team reached out a few weeks ago about the Employee Retention Credit(ERC). Just to confirm, as long as you had 3+ W-2 employees during 2020 and 2021(not including yourself), you ABSOLUTELY are eligible for the ERC.
We never heard back from you and wanted to see what you wanted to do about the ERC money owed to you from the IRS Covid Relief Program.
The business not only didn’t have contact with any payroll company, but it is also a single-member LLC—with no employees—so it wasn’t “owed” any ERC money.
Even if taxpayers may be pulled into these schemes by manipulative promoters, it’s important to remember that you are ultimately responsible for the accuracy of the information on your tax return. You owe it to yourself to do some digging to ensure you qualify.
Eligible taxpayers are those employers with qualified wages paid between Mar. 13, 2020, and Dec. 31, 2021. Additionally, you must have:
- 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;
- 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.
And, these credits are limited to business owners— it is not available to individuals.
If you do not meet the criteria, your business should not apply for the ERC, no matter how good it might sound. And there’s no double dipping—eligible employers cannot claim the ERC for any quarter for which wages were reported as payroll costs in obtaining Payroll Protection Plan (PPP) loan forgiveness or were used to claim certain other tax credits.
“Businesses should be wary of advertised schemes and direct solicitations promising tax savings that are too good to be true,” Werfel said. “They should listen to the advice of their trusted tax professional. Taxpayers should remember that they are always responsible for the information reported on their tax returns. Improperly claiming this credit could result in taxpayers having to repay the credit along with potential penalties and interest.”
Even if you ultimately decide not to pursue an impropriate claim for a refund, entertaining these scammers can result in other circumstances: some of these advertisements, including those that lead to websites, exist solely to collect your personally identifiable information. The scammers then use your information to conduct identity theft.
The IRS is stepping up enforcement action involving these kinds of ERC claims. On the civil side, the IRS has trained auditors examining these types of claims. Additionally, the IRS Criminal Investigation Division is looking for promoters of fraudulent credit claims.
Tax Professionals Impacted, Too
The IRS continues to remind tax professionals of their role with respect to ERC. Specifically, the IRS Office of Professional Responsibility sent a special bulletin to tax professionals on Mar. 7, 2023, outlining core responsibilities for ERC claims under Circular 230.
The bulletin noted, “If the practitioner cannot reasonably conclude (consistent with the standards discussed in this guidance) that the client is or was eligible to claim the ERC, then the practitioner should not prepare an original or amended return that claims or perpetuates a potentially improper credit.”
Under section 10.21 of Circular 230, if a practitioner learns that a current client did not comply with the ERC requirements in a prior tax year, the practitioner must promptly inform the client of the “noncompliance, error, or omission” and any penalty or penalties that may apply.
The IRS advises that, as a best practice, tax professionals should consider advising the client of the option of filing an amended return. A tax professional is not required to prepare an amended ERC claim unless asked by the taxpayers and only if the practitioner feels competent to do so—remember, not all tax professionals prepare returns. And even those who prepare some returns may not have experience preparing all returns, like payroll returns.
Penalties And Reporting
The willful filing of false information and fraudulent tax forms can lead to serious civil and criminal penalties.
As part of the Dirty Dozen awareness effort, the IRS encourages people to report tax-related, illegal activities relating to ERC claims, as well as individuals who promote improper and abusive tax schemes and tax return preparers who deliberately prepare improper returns.
The IRS encourages employers to report fraud and IRS-related phishing attempts to the IRS via email at [email protected] and to the Treasury Inspector General for Tax Administration online or by phone at 1.800.366.4484.
To report an abusive tax scheme or a tax return preparer, file Form 14242, Report Suspected Abusive Tax Promotions or Preparers, with any supporting evidence to the IRS Lead Development Center in the Office of Promoter Investigations.
Let’s be careful out there.