Fraudulent ERC Claims
If you have been listening to talk radio lately, you’ve most likely heard the latest come-on for small business cash assistance. Most of these advertisements claim your small business can receive up to $28,000 per employee per year in refunds of wages paid through the end of 2021.
Often times, these come-ons originate with what have come to be called “credit mills” and the IRS is in the process of catching up to many of the most aggressive, and sometimes fraudulent, claims. In fact, in a report issued this past August by the Treasury Inspector General for Tax Administration, the IRS had identified more than 11,000 “suspicious” federal returns that claimed more than $2 trillion in credits as of March 10, 2022. In addition, in April 2022, the IRS implemented new processes to identify potentially fraudulent claims by businesses with “questionable characteristics.”
This situation is a result of several COVID Relief provisions enacted by Congress in 2020 and 2021. The CARES Act originally provided an Employee Retention Credit (ERC) of up to $5,000 per employee per quarter which was then increased to $7,000 and extended through June, 2021 by the Consolidated Appropriations Act of 2021. Finally, the American Rescue Plan legislation extended the credit through the end of 2021, but only for “Recovery Startup Businesses.” While the availability of the credit was eliminated after 2021, taxpayers have three years from the filing of their federal payroll tax returns (Form 941) to amend those returns and claim the credit.
The ERC provides that for 2021, employers having fewer than 500 employees that either:
- Fully or partially suspended operation due to an appropriate governmental order.
- Had gross receipts for a quarter (or the immediately preceding quarter) less than 80% of its gross receipts for the same quarter in 2019.
In qualified scenarios, the ERC could be claimed in an amount equal to 70% of that quarter’s “Qualified Wages.”
The Bottom Line
In the absence of full or partial government shutdown, an employer must have experienced at least a 20% reduction in revenue in any quarter in order to qualify for the ERC. This requirement is frequently left out of the frequent and persistent radio advertisements. While the come-ons can claim that an employer may qualify “even if the employer’s business has grown,” the reality is that the credit is available only for wages paid (and not reimbursed by a PPP loan) in a quarter in which gross receipts dropped by more than 20% or the business’s operations were shut down by government order.
Another item not mentioned in the radio spots is that most of these credit mills receive a percentage (usually 25%) of any refund. Many of these outfits are recently formed businesses with no long history. With the ERC having expired in 2021, it would seem they would have no reason to continue in business once the refund claims have been filed. That fact should be kept in mind when you combine it with the enhanced enforcement being undertaken by the IRS with respect to these claims.
Taxpayers Should be Aware of Nuances
These hyped marketing claims gloss over the complexity of the rules, regulations and issued IRS Notices that are applicable to the ERC. The terms specified by the IRS (i.e., gross receipts, government orders, full or partial suspension) have very specific and precise definitions and taxpayers need to be aware of the nuances when subscribing their name to the amended Form 941 (941-X.)
The IRS will be using a portion of its recently appropriated $85 million enforcement funding to beef up examinations of ERC claims. An IRS spokesman said in a recent statement:
“With any new tax law, the IRS conducts training for examiners on how to successfully examine the issue. In order to conduct examinations of ERC claims as efficiently as possible, we are training groups of agents on the Employee Retention Credit. It is an important source of relief for small businesses in need of assistance.”
He added however:
“the IRS takes fraudulent claims of pandemic relief very seriously.”
Small businesses should always claim the full amount of each and every tax credit to which they are legally entitled. Prudence however, in choosing the party to assist in applying for the full credit, is essential.