Are you considering taking advantage of the pandemic era-Employee Retention Credit?
Then make sure you read on to learn how to protect yourself against potentially costly fines.
What is the Employee Retention Credit?
The Employee Retention Credit (ERC) is both a blessing and a curse.
The credit was born of the pandemic. The federal government incentivized employers to keep people employed by offering a tax credit of up to $26,000 per employee.
The intention was to help those employers who dug deep to keep employees on the payroll even when the business didn’t justify the overhead—especially during lockdowns.
To be eligible, an employer had to:
- Sustain a full or partial suspension of operations due to COVID-19 under orders from a government authority or
- Suffer a significant decline in gross revenue during 2020 or the first three quarters of 2021
- Qualify in the third or fourth quarters of 2021 as a recovery startup business
Of course, there are limitations—especially if payroll costs had been claimed either for PPP loan forgiveness or certain other credits.
And it’s important to note that not every employee will generate $26,000 for the employers.
The Problem with Employee Retention Credit
As is often the case, unscrupulous actors saw ERC as a means for quick profits.
Maybe you’ve seen the ads and gotten the spam emails.
“We don’t get paid unless you do.”
What they don’t mention is that they won’t be here to defend the taxpayer when the IRS audits.
They also “forget” to amend previous returns that had deductions and credits which must be given back to legally qualify for the ERC.
It has become such a problem the IRS has published at least six warnings about this abuse since October 2022, and it has climbed to number 1 on the annual Dirty Dozen list of scams, surpassing OIC mills and virtual asset reporting.
Not only has it become a prime collection target, but with the flood of claims (866,326 as of March 3, 2023) the IRS dealing with an extensive backlog.
This means many legitimate claims aren’t being addressed. As of April 30, 2023 the Criminal Investigation Division (the division that can show up to a home or business and apply the cuffs) have started 122 investigations for potentially fraudulent claims. The value of these claims is over a billion dollars.
So far at least 11 taxpayers have faced federal charges. Of those, six have been convicted. Three of those were sentenced to an average of 22 months.
How to Protect Yourself and your small business
Take some good advice from the IRS. Never let one of these cold-calling, here-today-gone-tomorrow companies talk you into letting them make the claim.
Hire a tax professional that will take the time to look at the years in question, fill out the claim correctly and be there if the IRS audits the return.
Audits can be scary, and they disrupt the target’s life even in the best of circumstances, they have limits. The IRS generally looks back only three years, but there are exceptions to that rule.
One big exception is fraud.
If the IRS can demonstrate fraud, there is no limit to how far back they can dig. For a sole-proprietor (including single-member LLC), a partnership, or S-Corp, that could mean for as long as the taxpayer has been working.
I started working at 15 and am 64 now. Many readers don’t have that long a work history, but even if that work history is only 20 years, who wants to have every return reviewed back to the first return they either filed or should have filed?
Who has records going back that far?
The Short Version
If you think you might qualify for the ERC it’s imperative that you contact a competent accounting firm that will ask the tough questions, and be there to defend you if the IRS comes calling.
With well over a billion dollars at stake, rest assured, they will.
Want to make sure you aren’t at risk? Schedule your FREE consult call now.