Introduction
The Internal Revenue Service has warned organizations about increasing fraud ERC claims. While Employee Retention Credit is an effective way for businesses to recoup paid wages, it often gets generalized and gets the attention of cybercriminals. The fraudulent activity encourages businesses to submit employment retention tax credits that are not eligible for the program.
So, if businesses receive a guaranteed, refundable tax credit offer without the need to check books, they should consider it a fraudulent scheme. Businesses should head in a different direction when they receive physical letters or emails claiming this type of information.
ERC Fraud – the IRS Rings the Warning Bells
Recently, many employers have heard that they can claim the ERC even when they’re not eligible for the relief plan. But after the IRS warnings to taxpayers for fraud ERC, the American business community has become more cautious when an unrelated party guarantees tax savings.
Specifically, the IRS warns taxpayers to be cautious about third parties that promise the impossible and put them in a difficult position. Fraudsters often charge significant upfront or contingent fees based on the refunds businesses usually do not know are related to getting a tax credit. CPAs are at the forefront of helping businesses stay away from these fraudulent claims and promises.
A report highlights that the IRS updated its identity theft and fraud filter, which is designed to detect suspicious and fraudulent tax return claims. The latest findings by the IRS have managed to identify over 11,000 returns that account for up to $2 trillion in claimed credits.
Understand ERC Fundamentals to Avoid Fraudulent Claims
Businesses aware of the ERC tax credit requirements by the IRS weren’t misguided by the fraudulent claims. In short, ERC works as a tax credit for businesses to offset 2020 and 2021 employment taxes.
The credit represents a percentage of eligible wages that allows businesses to get over $5,000 per worker in 2020 and over $28,000 per worker in 2021. Now, to become eligible, employers should have maintained business operations to claim this tax credit.
One of the main requirements for businesses is to show a significant decrease in their gross receipts during 2020-21 due to COVID-19. Employers can show partial or complete suspension of business operations amidst the pandemic to qualify and claim the tax credit. The tax credit ties together with the payroll and requires quarterly calculation.
Impact of ERC Fraud
According to a Government Accountability Office report, businesses have claimed over 365,000 ERC tax credits that round up to $32 billion. GOA also highlights it solely had direct access to partial information. It means there is a good chance ERC tax credit returns are higher than officially reported.
The main issue is that there is no specific approach for the IRS to validate and verify if an employer is a recovery startup business (RSB). It is one of the underlying reasons for increased fraud in tax credits.
How Treasury Views ERC Tax Credit Fraud
The Treasury Inspector General for Tax Administration reports over 900 non-eligible businesses claiming ERC tax credits amount to almost $17.5 million. While these businesses had an EIN, it was issued prior to February 2020, which falls into ineligibility.
TIGTA also notes that the IRS was on short time to make relevant programming changes amidst an ongoing tax filing season. As a result, the IRS was not able to screen tax returns to identify fraudulent ERCs. Later, the IRS managed to put 11,000+ suspicious returns on the blocking list, indicating direct theft that accounts for up to $2 trillion in claimed credits. Since then, the IRS has put in place new processes and guidelines to identify potential ERC-related fraudulent claims.
Originally, the ERC was supposed to help businesses retain employees and drive sustainable growth during the severe economic turmoil of the pandemic. But now, the IRS is actively warning taxpayers and businesses about potential ERC fraud and scams.
For instance, a Utah taxpayer was found guilty of submitting false tax returns and claiming over $11 million in ERC tax credits. In fact, the guilty party convinced and influenced independent contractors to turn their business operations into LLCs to become eligible and claim ERC.
The fraudster charged every client a fee for preparing tax returns to claim the ERC. It would be fair to state that free money will always be tempting to fraudsters. Typically, fraudsters try to trap employers unaware of the current ERC tax credit requirements and business guidelines.
The Curse of ERC Solicitations
Tax professionals weren’t surprised to see increasing solicitations. Still, it was concerning for the IRS and tax experts to see passive-aggressive fraudulent tax credit claims targeted at businesses. In fact, more third parties are trying to convince and influence taxpayers to get massive refunds.
What’s worse is that these emails are personalized and often trap employers from the first sentence. Businesses continue to receive more ERC tax credit solicitations via email. Some emails convince employers that they claim more than $50,000 in tax credits.
But a promise or guarantee like this without knowing anything about the company’s employees or financial position is a red flag. Most credit-claiming emails communicate to businesses that if they have the W-2 forms of a few employees during 2020-21, they can qualify for Employment Retention Credit.
ERC Voice Mails
Like emails, businesses receive voice emails encouraging and promising them to avail ERC tax credits amounting to thousands of dollars. To make matters worse, many businesses have forwarded copies of these unsolicited voicemails, which leads to more fraud and scams.
ERC Fraudulent Claims: Perspective
From the employers’ perspective, ERC tax credit scams and fraud are added stress. But with proper guidance and support from tax professionals, startups can easily read the signs and the red flags and avoid potential ERC tax credit fraud.
While the ERC tax credit continues to exist for over two years, solicitations continue to pile up. Tax experts believe that economic uncertainty and turmoil play a major role. And fraudsters know that small businesses make up the perfect targets.
Some might even profess that the official warning from the IRS about the fraudulent ERC tax credit claims should’ve been earlier. Still, the word is out from the IRS, and the burden of responsibility is on the employers to take basic measures to avoid potential ERC-related tax credit scams.
Penalties, interest, and credit repayment come into play when employers improperly claim an ERC tax credit. IRS notes that taxpayers need to avoid these bogus tax credit claims and report the correct tax returns. Tax professionals highlight that the focus should be on taxpayer data.
While it may seem obvious, most employers assume that every business is eligible to claim ERC, and this is where all the trouble starts. Businesses should reach out to their financial advisors when they receive fraudulent tax credit emails and voicemails. It would help employers determine their eligibility and allow them to take the right steps to avoid future tax credit scams.
Fraudulent ERC Tax Credit Claims: Watch for Key Red Flags
IRS warnings on fraudulent employee retention tax credit claims are a step in the right direction. As the discourse around ERC continues, businesses should be able to differentiate between legitimate and mill offers. Employers should watch out for red flags when reviewing their options.
- Solicitations that make promises and guarantees without direct access to your company’s payroll and financial information
- When refund tax credits are higher than the entire payroll
- Directly encouraging employers to claim tax credits even when they don’t have payroll information
- Recovery fee in the form of a percentage
Final Thoughts
Suppose there was a cutback of eligible paid wages before filing tax returns and claiming the tax credit. In that case, employers can file amended returns and resolve overstated wage reductions. Employers are bound to get direct solicitation emails from third parties. The wise thing for businesses would be to be cautious and better understand the official IRS guidelines to apply for and claim the ERC.
So, identify the red flags to avoid becoming one of the victims of tax fraud. In the end, companies are responsible for paying employee salaries and reporting the tax whether or not a third party has direct or indirect involvement to get a tax credit. In retrospect, a high number of ERC tax credit claims may require repayment of the credit and trigger significant interest and penalties.
