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Designed to provide relief for businesses that kept employees on the payroll during COVID, the Employee Retention Credit (ERC) was exploited by unethical promoters who pushed ineligible businesses to file claims. These claims have landed businesses, responsible parties, and promoters in trouble with the IRS.
What Are ERC Scams, and Why Are They Dangerous?
The ERC was established to provide relief to employers who continued to pay their employees during the COVID-19 pandemic. However, opportunistic promoters encouraged businesses to file for ERC refunds, regardless of whether they met the necessary criteria. Congress and the IRS are reviewing filed ERC Claims, and the Statute of Limitations for these reviews has been extended.
Businesses that filed ERC claims should be prepared for the following:
IRS audits
A moratorium on new claim submissions took effect on September 14, 2023, and the IRS is scrutinizing previously-filed ERC claims more closely than ever.
Penalties and interest
Businesses filing ineligible claims may be liable for repayment, plus interest and penalties.
Criminal prosecution
In extreme cases, filing a fraudulent ERC claim can result in criminal charges.
Key Red Flags for ERC Audit
The Internal Revenue Service has offered what it considers to be Red Flags to trigger an ERC tax audit:
Claiming all seven quarters
Claiming a government order that doesn’t qualify under the program
Improper wage claims (e.g., using the same credit amount for all employees, where some did not qualify)
Utilizing supply chain issues as the sole qualification
Claiming too large of a credit (e.g., claiming wages paid for the entire quarter when the business was only shut down for part of it)
No wages were paid to employees during the ERC eligibility tax period
Association with a firm that has come under IRS scrutiny for filing fraudulent claims for other businesses
What To Do If You Think You Filed An Inappropriate ERC Claim
If you’ve already submitted an ERC claim based on misleading advice, you have options:
If you were ineligible yet still claimed and received the ERC, the IRS has a Voluntary Disclosure Program whereby you can return the funds received in certain tax years (less 15%).
The IRS also has an ERC Withdrawal Program for those wishing to withdraw their claims. You can withdraw your claim if it hasn’t been processed, potentially avoiding penalties and interest. However, swift action is essential – delaying could have significant financial repercussions.
What to Do if You Have Received an ERC Letter from the IRS
If you have received an ERC Letter from the IRS, gather the documentation requested and retain a tax attorney to prepare your response. Ignoring the letter can lead to penalties including repayment with interest and penalties, tax liens to recover amounts you owe, criminal tax charges, loss of professional licenses, and overall damage to your professional reputation.
You need to respond promptly and accurately to IRS demands, so don’t delay and seek qualified assistance immediately.
How Paley & Prehn Can Help You
The allure of an ERC refund may be tempting, but cutting corners or trusting the wrong sources can have devastating consequences. Whether you’ve been misled by aggressive promoters or are simply uncertain about your eligibility, the tax attorneys at Paley & Prehn can help.