IRS steps up crackdown on employee retention credit scams

The Internal Revenue Service is warning businesses to beware of scams promoting abuse of the Employee Retention Credit as the IRS holds off on processing many of the claims that have been flooding into its offices.

Earlier this year, the IRS put ERC scams at the top of its annual list of the Dirty Dozen tax scams (see story). But the IRS and tax professionals are continuing to see a barrage of aggressive broadcast advertising, direct mail solicitations and online promotions involving the Employee Retention Credit, as described in a recent Wall Street Journal article. While the credit is real, the IRS acknowledged, but aggressive promoters are wildly misrepresenting and exaggerating who can qualify for the credits.

The IRS has been stepping up its audit and criminal investigation work involving bogus ERC claims. Businesses, tax-exempt organizations and others considering applying for this credit need to carefully review the official requirements for this limited program before applying. Those who improperly claim the credit face follow-up action from the IRS.

“The aggressive marketing of the Employee Retention Credit continues preying on innocent businesses and others,” said IRS Commissioner Danny Werfel in a statement Thursday. “Aggressive promoters present wildly misleading claims about this credit. They can pocket handsome fees while leaving those claiming the credit at risk of having the claims denied or facing scenarios where they need to repay the credit.”

Tax professionals have been seeing clients with legitimate claims also coming under suspicion. The Top 100 Firm Sikich hosted a program earlier this month for financial clients to give an A-to-Z rundown of employee retention credit rules and regulations. It heard a stunning admission from attendees that day during a poll of the participants. Sikich learned a whopping 96% of the attendees who have already applied for and received their company’s ERC-related refund now are targets of a nationwide IRS crackdown. IRS audits are underway on 135 of 140 attendees’ refund claims. In addition, 58% of respondents said they are being approached daily or weekly by ERC providers offering “claim and refund-related services.” 

The Employee Retention Credit (ERC), also sometimes called the Employee Retention Tax Credit or ERTC, is a legitimate tax credit. Many businesses legitimately apply for the pandemic-era credit. The IRS has added extra staff to handle ERC claims, which are time-consuming to process because they involve amended tax returns.

“This continual barrage of marketing by advertisers means many invalid claims are coming into the IRS, which also means it takes our hard-working employees longer to get to the legitimate Employee Retention Credits,” Werfel stated. “The IRS understands the importance of these credits, and we appreciate the patience of businesses and tax professionals as we continue to work hard to get valid claims processed as quickly as possible while also protecting against fraud.”

The IRS has been issuing warnings about aggressive ERC scams since last year, in addition to adding it to the “Dirty Dozen” tax scams list.

The IRS said the ERC is an ongoing priority area in many ways, and the IRS continues to increase compliance work involving ERC. The IRS has trained auditors examining ERC claims posing the greatest risk, and the IRS Criminal Investigation division is working to identify fraud and promoters of fraudulent claims.

The IRS reminded anyone who improperly claims the ERC they need to pay it back, possibly with penalties and interest. A business or tax-exempt group could find itself in a much worse cash position if it has to pay back the credit than if the credit was never claimed in the first place. So, it’s important to avoid getting scammed.

When properly claimed, the ERC is a refundable tax credit designed for businesses that continued paying employees while shut down due to the COVID-19 pandemic or that had a significant decline in gross receipts during the eligibility periods. The credit isn’t available to individuals.