IRS Warns of Employee Retention Credit (ERC) Scams
ERC Scams – What are They?
On March 7, 2023, as a follow-up to a prior Information Release (IR) 2022-183, the Internal Revenue Service (IRS) issued IR 2023-40, warning employers “to be wary” of third-party consultants taking improper positions related to taxpayer eligibility to claim the Employee Retention Credit (ERC). Cherry Bekaert has noticed a significant amount of radio and television advertising by multiple providers of ERC-related services for which large contingent fees are charged.
Employee Retention Credit Background
To provide relief to small businesses, Congress enacted a regime to provide refundable employment tax credits to eligible employers based on wages paid to workers from March 13, 2020, through September 30, 2021 Under the Employee Retention Credit regime, an employer is eligible if they experienced at least one of the following:
- A partial suspension of operations due to COVID-19-specific government orders limiting commerce, travel or group meetings
- A significant decline in gross receipts
A significant decline in gross receipts under 2020 circumstances entails a decline of more than 50 percent when comparing quarterly gross receipts in 2020 to the same calendar quarter in 2019. Regarding the three ERCs available during the first three quarters of 2021, a taxpayer must have suffered more than a 20 percent decline in quarterly gross receipts, compared to the same calendar quarter of 2019. A partial suspension due to a government order is based on specific facts and circumstances that should be researched and documented.
Fraudulent Employee Retention Credit (ERC) Claims
By issuing IR 2023-40, the IRS reiterates that taxpayers, and not the third-party consultant, are responsible for the filed claims. The IRS has made clear in its prior guidance that a government order does not include published recommendations or best practices. Thus, relying on Center of Disease Control (CDC) or Occupational Safety and Health Administration (OSHA) recommendations regarding a safe workplace will not qualify an employer for the credit, even though following that guidance may increase costs.
Large employers can only claim the credit if payments are made to employees for “not providing services.” The IRS clearly stated that payments for not providing services do not include payments for vacation pay, sick leave or other paid time off. Cherry Bekaert has observed many third-party consultants ignoring this IRS guidance.
In addition, many third-party consultants do not inform taxpayers of the requirement to reduce deductions claimed for wage expenses by the amount of the ERCs (usually by filing an amended income tax return). By failing to advise taxpayers of this income adjustment, the credits appear more valuable than when considered on a net basis.
Work with Cherry Bekaert to Avoid ERC Fraud
Cherry Bekaert has worked with more than 1100 Eligible Employers to claim the ERC under the government order and gross receipts tests. While none of our clients have had their credits challenged by the IRS, we have seen an increase in IRS correspondence requesting additional documentation to support the claims. In the IRS examinations with which we are familiar, we have observed requests for contemporaneous documentation including emails regarding layoffs or the inability to obtain supplies to maintain production levels.
How We Can Help
The Employee Retention Credit is a valuable benefit that should not be overlooked. Eligible Employers may claim the 2020 ERC until April 2024 and the 2021 ERC until April 2025. For those employers who filed claims for ERC through another consultant, we also offer assistance with review and evaluation of your filed claim. We continue to talk with employers every day about ERC. We look forward to talking with you.
Our deliverables include:
- Amended Forms 941X
- Technical analyses of Eligible Employer status including:
- References to specific government orders causing a partial shut-down of operations
- Effects of shut-downs on a more than nominal portion of a business
- Government orders causing supply chain disruptions
- Gross Receipts data from 2019-2021
- Credit Calculations including:
- Wages paid during the appropriate period
- Employer-provided health care expenses
- Allocation of wages between Paycheck Protection Program (PPP) loan forgiveness and the ERC
If you would like assistance to determine your organization’s ERC eligibility, please reach out to your Cherry Bekaert professional or the ERC team.
- 2022 Most Frequently Asked Questions about the Employee Retention Credit (ERC)
- What You Need to Know About the Employee Retention Credit
- Determining Eligibility for the Employee Retention Credit
- Supply Chain Disruptions, Government Orders, and the Employee Retention Credit
- Your Business Can Still Apply for Employee Retention Credits in 2022