Employee Retention Credit

The Employee Retention Credit or ERC, as it has come to be called, is both a blessing and a curse.

The credit was born of the pandemic.  The federal government wanted to encourage employers to keep people employed as much as possible.  The easiest way to impact the employer’s decision is with a credit.

When cone as intended, it can help those employers who dug deep to keep employees on the payroll even when the business didn’t justify the overhead especially during lock downs.

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

  • The first three quarters of 2021

  • or

• Qualify in the third or fourth quarters of 2021 as a recovery startup business.

There are limitations, especially if payroll costs had been claimed either for PPP loan forgiveness or certain other credits.  Also, not every employee will generate $26,000 for the employers.

The Scam

As is often the case, unscrupulous actors will see the prospect of quick profits.  We have all seen the ads and gotten the spam emails.  These scammers claim, “You don’t pay unless the IRS does.”  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) has 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.  This 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, with three being sentenced to an average of 22 months.

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?

Conclusion:

If a business thinks they might qualify for the ERC, they should contact a competent firm that will ask the tough questions, and be there to defend them if the IRS comes calling, and with well over a Billion dollars at stake, rest assured, they will.

At Books, Taxes & More, we dig for the truth and protect our clients.