ERC Credit and IRS Warning: Navigating the Rules and Avoiding Fraud

By Michael Lodge - The Business Advisor - www.lodge-co.com:  The Employee Retention Credit (ERC) has been a lifeline for businesses affected by the COVID-19 pandemic. Designed to provide financial relief to companies that continued paying employees during government shutdowns or experienced significant declines in gross income, the ERC is a refundable tax credit. However, recent reports have highlighted the rise of third-party companies making extravagant promises of large credits without adequately informing businesses about the rules and qualifications associated with the ERC. In response, the Internal Revenue Service (IRS) has issued a warning about potential fraud and emphasized the importance of understanding the credit's requirements. This article aims to shed light on the ERC rules, caution against fraudulent claims, and encourage businesses to seek guidance from qualified tax professionals.

Understanding the ERC and Its Rules:  The ERC was introduced as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020. It was later expanded and extended by subsequent legislation to provide additional support to businesses. The credit is available to eligible employers who retained employees and continued to pay wages during periods of significant disruption caused by the pandemic.

To qualify for the ERC, businesses must meet specific criteria. These include experiencing either a full or partial suspension of operations due to government orders or a significant decline in gross receipts compared to the same quarter in the previous year. Eligible employers can claim a percentage of qualified wages paid to employees during the mandated shutdown by government, subject to certain limitations, for specific periods determined by the IRS.  If you take the credit, you will need to file an amended business tax return to apply the credit.  You may owe corporate taxes at that time if it increases you net income. The IRS will examine the credit that you took for ERC, they will also look at any PPP money you took to see if you are double dipping.  If they deny you the credit later on there will be interest and penalties do.  You will need to document the time you were shut down, copies of the shut down mandate by the government. This is just a brief overview, please talk to your tax accountant on the issue of qualifying.  

The Role of Third-Party Companies:  Unfortunately, some third-party companies have sought to take advantage of the confusion and financial distress caused by the pandemic. These companies often make enticing promises of substantial credits, with claims as high as $26,000 per employee. However, they frequently fail to inform businesses about the eligibility requirements, the necessity of filing an amended return, and the risks associated with improper claims.

IRS Warning on Fraudulent Claims:  Recognizing the potential for abuse, the IRS has taken action to warn businesses about these unscrupulous practices. On IRS.gov, the official website of the IRS, a renewed warning has been issued regarding employee retention credit claims. The agency highlights the compliance risks associated with making improper claims and emphasizes the importance of understanding and adhering to the ERC rules.

IRS Web Site:  irs.gov

Protecting Your Business:  To avoid falling victim to fraudulent practices and potential audits, it is crucial for businesses to exercise caution and due diligence when considering third-party services related to the ERC. Here are some essential steps to protect your business:
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1. Consult a Tax Professional: Engage the services of a qualified tax accountant or advisor who can guide you through the ERC rules, determine your eligibility, and assist you with the necessary documentation and filing requirements.

2. Educate Yourself: Take the time to read and understand the guidelines and notices issued by the IRS. This will enable you to make informed decisions and identify any red flags or misleading claims made by third-party companies.

3. Be Wary of Promises: Exercise caution when approached by third-party companies guaranteeing substantial credits without adequately assessing your eligibility. Remember that if a deal sounds too good to be true, it probably is.

4. File Accurate and Amended Returns: Ensure that you file accurate and complete tax returns, including any amendments required to claim the ERC. Failing to report the credit properly or including false information may result in potential audits and penalties.

The ERC is available - if you qualify for the ERC credit and have complied with the rules of filing, you should be ok.  But you want to make sure you qualify and not have to face any IRS questions and determinations down the road.  Compliance will make sure you are protecting your business.  Again, talk with your accountant.

For business advisory / coaching - schedule a confidential session online at:  http://www.lodge-co.com 

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