Last April, we discussed how the proliferation of Employee Retention Credit (ERC) scams prompted the IRS to add them to their annual Dirty Dozen list of tax scams. Now, six months later, there has been an alarming surge in ERC claims, with nearly 600,000 filed in the past 90 days, likely containing fraudulent or ineligible requests.
Growing ERC Fraud
As of July 31, 2023, the IRS has investigated over 250 fraudulent claims totaling $2.8 billion, leading to 15 federal charges. More audits and IRS correspondence are expected soon, with ERC-focused payroll tax audits intensifying in Q4 2023.
To qualify for ERC, a business must have faced suspension due to government orders or a significant revenue decline. ERC expired for most businesses on September 30, 2021, except for qualified pandemic startups.
Misleading Information from ERC Mills
Seeing an opportunity to make some quick cash, “ERC mills” have popped up everywhere. Most of them prey on small businesses, hoping to exploit vague IRS guidance, especially regarding supply chain disruptions, to falsely promise businesses the full $26,000 per employee credit. They often omit crucial requirements, like amending income tax returns and paying taxes on ERC refunds.
In response, the IRS issued guidance clarifying ERC eligibility and exposing most ERC mills’ false claims based on supply chain disruptions.
These ERC mills use aggressive marketing, unsolicited communication, specific refund promises, or percentage-based fees to convince business owners that they can be part of a cash windfall.
Be Aware of Deadlines, Precautions & Timelines
If a refund is issued for any ERC quarter, the IRS has three years from the filing date of the 941X to audit it. Exceptions apply to Q3 and Q4 of 2021 for which the IRS has 5 years to audit it. In case of an issue, the business must repay the refund, plus a potential 20% penalty and interest. This could lead to a worse financial position than not getting a refund in the first place, considering income tax due on ERC expense adjustment and fees.
Even if a third party files the ERC claim, the taxpayer is responsible for what’s reported on their return. Businesses should request a detailed eligibility and calculation worksheet from their preparer. If unavailable or inaccurate, the claim’s legitimacy should be questioned, ideally by their CPA or financial advisor, with documentation kept for potential IRS scrutiny.
- Processing times after IRS halted ERC processing on September 14 may be long, possibly 180 days or more, even for legitimate claims.
- Deadline for retroactive 2020 ERC claims is April 15, 2024, and for 2021 claims, April 15, 2025.
- IRS might introduce electronic filing of amended 941X forms in early 2024 to improve processing.
We anticipate the IRS release additional guidance for handling fraudulent ERC claims at some point in the future. In the meantime, if you have questions or think you have received ERC funds in error, reach out to us right away so we can analyze your situation and recommend a plan.