The Employee Retention Tax Credit (ERTC or ERC) threw a much-needed lifeline to struggling small businesses during the COVID-19 pandemic, but confusion about eligibility for the tax credit and misleading guidance by third-party tax consultants has led to rampant fraudulent claims that put business owners across the country at risk of an ERC audit.
Even well into 2023, years after the program went into effect as part of the CARES Act, third-party “tax credit mills” continue to aggressively promote fraudulent ERC claim schemes through radio and online advertisements that take advantage of hardworking business owners and put them at risk of an IRS audit by unknowingly claiming tax credits they were ineligible for.
For this reason, the IRS has recently issued a new warning on Employee Retention Credit claims advising small business owners to exercise caution regarding ERC mills and to take steps to protect themselves from the potential negative effects of improper ERC claims.
What is the Employee Retention Credit IRS notice?
On March 7, 2023, the IRS issued a press release once again warning taxpayers of the risks of improperly filing ERC claims and promoting the wariness of fraudulent ERC credit schemes promoted by third-party tax consultants across the nation. This is the third such warning the IRS has made regarding fraudulent ERC credit schemes, signaling that the IRS will be closely examining ERC claims and that there will most likely be an increase in ERC audits.
In the news release, the IRS reiterates:
- Small business owners should always carefully review the Employee Retention Credit guidelines before trying to claim the credit.
- Taxpayers need to be wary of third parties aggressively promoting misleading, fraudulent ERC schemes on the radio and online.
- Taxpayers should be particularly wary of ERC promoters who charge large upfront or contingency fees.
- There are consequences, including ERC audits and even potential criminal investigations, for both taxpayers improperly claiming the Employee Retention Credit and aggressive ERC promoters.
As well as fraudulent third-party ERC promoters misleading their clients, legitimate tax professionals have also reported being pressured by clients wishing to improperly claim ERC for their business. The IRS recommends small business owners everywhere listen to the advice of their trusted tax professionals if questions are raised regarding the accuracy of their claims.
Furthermore, the IRS announced additional guidance for tax professionals to help them better educate their clients on the nuances of ERC and help them evaluate whether or not they have a legitimate claim. On March 7, the IRS Office of Professional Responsibility sent a special bulletin to tax professionals outlining core responsibilities for ERC claims under Circular 230, in order to help legitimate tax consultants and attorneys provide clear ERC advice for their clients.
Since the publication of the news release, the IRS has also released a follow-up publication further advising scrutiny over aggressive ERC promoters who make “too good to be true” offers as part of its annual “Dirty Dozen” list of the year’s twelve most dangerous tax scams and schemes. ERC promotions by third-party consultants came in at the top of the IRS’ “Dirty Dozen” list, again highlighting that taxpayers can expect their ERC claims to be at risk of a closer examination by the IRS.
New IRS Guidance on Employee Retention Credit
The IRS also offers guidance on how to report tax-related illegal activities relating to ERC claims, such as the actions of third-party ERC scheme promoters. To report an abusive ERC scheme or tax return preparer, mail or fax a completed Form 14242, Report Suspected Abusive Tax Promotions or Preparers and any supporting materials to the IRS Lead Development Center in the Office of Promoter Investigations:
Internal Revenue Service Lead Development Center
24000 Avila Road
Laguna Niguel, California 92677-3405
If you are worried that you may have inadvertently claimed Employee Retention Credits on your 2020 or 2021 tax return that you were not eligible for, the IRS advises you to work with a trusted tax professional to prepare and file an amended tax return for the year in question.
The IRS understands that many fraudulent ERC claims are simply the result of honest mistakes or misleading advice from tax scammers, and as a taxpayer, the most surefire way to steer clear of potential negative consequences is to take steps as soon as you can to make things right.
What are the recent changes to the Employee Retention Credit?
Over the past couple of years since the passage of the CARES Act, retroactive changes have been made to the ERC, but the vast majority of these changes have been made in 2020 and 2021, and from 2022 onward, there have been no recent changes to the ERC to make a wider range of small businesses eligible for the credit, which is a false claim that ERC scammers may make to mislead clients.
In mid-2022, the IRS announced that it would conduct sweeping and wide-ranging audits of ERC claims due to the volume of ERC claims made by businesses that were ineligible or not fully eligible for the program’s refunds.
Can you still apply for the employee retention credit in 2023?
Employee retention tax credits are only available for the years 2020 and 2021. The new IRS guidance on Employee Retention Credit reiterates the eligibility standards for making an ERC claim. In order to have a legitimate claim, one of the following must be true for your small business:
- Your business 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
- Your business must have experienced a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021
- Your business must have qualified as a recovery startup business for the third or fourth quarters of 2021
Only recovery startup businesses are eligible for ERC in the fourth quarter of 2021.
That said, you can still apply for ERC credit in 2023, but you will be applying for that credit to retroactively be applied to your 2020 or 2021 returns. You will need to file amended 941-X forms for each quarter you wish to claim the credit.
Claiming the Employee Retention Credit in 2023
Businesses have three years after the end of the ERC program to retroactively claim ERC tax credits. It is still possible, then, to claim an ERC refund for 2020 or 2021 if you are indeed eligible.
To claim ERC credit in 2023, you simply need to file amended 941-X forms for each eligible quarter in 2020 or 2021 with the help of a trusted tax advisor. However, you must be absolutely certain, if you wish to do this, that you were eligible for Employee Retention Tax Credit during the time period in which the credit was available.
It’s important to keep in mind that ERC qualifications for 2020 and 2021 differ in several ways, including the timeline for filing for employee retention credit. Amended payroll tax returns from 2020 can be submitted for ERC claims until April 15, 2024, with the deadline for 2021 payroll tax returns being April 15, 2025.
As the IRS has warned, fraudulent ERC promoters remain prevalent and promote many of their schemes through misleading websites, making it hard to know where to go for legitimate information on how to apply for ERC and whether you were eligible in 2020 or 2021 to claim ERC on your tax returns.
The guidance the IRS has provided to tax professionals should help demystify Employee Retention Credit and cut down on the confusion, and will hopefully draw more attention to abusive ERC schemes that mislead business owners and taxpayers and draw them into potential legal hot water.
If you’ve claimed ERC tax refunds for 2020 or 2021 and worry you may not have qualified, or you’ve been notified of an ERC audit, you can count on Wiggam Law for help. If you believe you may have been misled by a fraudulent third-party ERC provider, it is vital to have a risk assessment done to evaluate the likelihood of being the subject of one of the many oncoming ERC audit notices.
Wiggam Law is leading the fight against fraudulent ERC mills, and we are here to help you evaluate your eligibility for the Employee Retention Tax Credit and defend you in the event of an ERC audit to ensure the best outcome possible to protect your business and your assets.