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Business owners should look carefully at ERC promotions

Among the many lessons we've learned, or not, from the COVID-19 pandemic is that we'll likely never be rid of it.

And as the transition to endemic status progresses, we'll continue to deal with flare-ups like, irony alert, the one that erupted following the Centers for Disease Control (CDC) and Prevention's recent first in-person Epidemic Intelligence Service conference in four years.

The same persistence seems to apply to taxes, too.

As the severity of COVID-19 became clearer, most of the United States went into lockdown to help slow its spread. While that saved lives, it also was a death knell for many businesses.

To help companies survive, Congress created a variety of programs, including the Employee Retention Credit or ERC. The program, also sometimes referred to as the Employee Retention Tax Credit or ERTC, was part of the initial $2 trillion pandemic relief law.

But in addition to helping businesses, the ERC has created a new wave of tax fraud.

Good intentions usurped by tax con artists: The ERC offered businesses thousands of dollars per employee as long as they showed that the coronavirus was hurting their bottom lines and that they were continuing to pay workers.

The tax break was expanded several times before it ended in late 2021. But tax law allows eligible companies three years to file amended tax returns and retroactively claim the ERC.

Tax crooks are also taking advantage of this added claim time.

ERC scammers are employing the usual trick of taking a real tax law and perverting it. The crooks have been aggressively promoting their ERC schemes through broadcast advertising, direct mail solicitations, and online offers.

These unscrupulous promotors, warns the Internal Revenue Service, may lie about the tax credit's eligibility requirements.

Some con artists tend to charge upfront fees from businesses to claim the ERC. Others demand a fee based on a percentage of the company's refund based on the ERC.

Plus, notes the IRS, companies who fall prey to illegal ERC promotions run the added risk that the con artists are using the credit as a ploy to steal the taxpayer's identity and inflict further damage.

A closer look at ERC scams: This wave, some say flood, of fake ERC claims is the focus of this weekend's Saturday Shout Outs.

This Little-Known Pandemic-Era Tax Credit Has Become a Magnet for Fraud, writes Alan Rappeport for the New York Times.

It's also very costly. Rappeport notes —

"In 2021, after Congress expanded eligibility, the Congressional Budget Office projected that the credit would cost the federal government about $85 billion over a decade — up from an earlier estimate of $55 billion. Even that turned out to be an underestimation: The I.R.S. said it had already paid out $152 billion in refunds associated with the tax credit and had a backlog of about 800,000 applications that it was trying to process."

That's why the IRS, which admits that it doesn't know how many of the approved refunds were based on fraudulent applications, has begun ramping up efforts to root out scams. It's also focusing more closely on filings from firms that appear suspicious.

The extent of the effort to find and stop fake ERC claims is highlighted in today's second Saturday Shout Out, Wall Street Journal tax reporter Richard Rubin's piece on The Pandemic-Era Tax Break Keeping the IRS Up at Night.

"Agency officials are wading through another roughly 800,000 returns that need processing — and more are still arriving," writes Rubin. "The continued flood of claims for the employee-retention tax credit is straining the IRS, which is caught between pressure to process refunds quickly and concerns about paying money that businesses don't deserve. … Small business owners, meanwhile, complain about monthslong waits for much-needed tax refunds."

Finally, there's a Shout Out to the IRS.

The tax agency last week reiterated its ERC alert, which made the IRS' latest Dirty Dozen list, urging businesses and tax-exempt groups to be on the lookout for the warning signs of misleading ERC scams. They include —

  • Unsolicited calls or advertisements mentioning an "easy application process."
  • Statements that the promoter or company can determine ERC eligibility within minutes.
  • Aggressive claims that the tax break is easy to claim, when it actually is a complex credit that requires careful review before applying.

The IRS is especially concerned about promises by ERC promoters that businesses have nothing to lose by submitting a claim. That's not true. If the IRS finds your company improperly received the credit, you'll have to repay it, along with substantial interest and penalties.

Employee Retention Credit scams IRS graphic

The IRS notice also elaborates on ERC scammers' tactics, as well as ways you can protect yourself and your businesses.

Yeah, it's not light Saturday Shout Out reading, but it is important. So if you're considering filing an ERC claim or have been hit up (probably repeatedly) by folks urging you to hire them to make the claim, check out today's items.

You might not get to claim the ERC, but the articles' information could save you lots hassle and possibly money you'd have to give back (and more) if you fell for an ERC scam.

You also might find these items of interest:

 

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