Employee Retention Credit (ERC) related scams are on the rise
Every year, the Internal Revenue Service (IRS) releases their infamous Dirty Dozen list.
A coveted record of both old and new scams, the list operates as an opportunity to educate taxpayers on the most common scams in a given year. Many of these plots begin to reach their peak closer to the April 18th, 2023 tax deadline. With the deadline right around the corner, we wanted to highlight one scheme that has been prevalent throughout 2023. Employee retention credit (ERC) related scams is the Dirty Dozen’s newest addition and shows no signs of leaving anytime soon.
What is the ERC?
The ERC is a type of tax credit that first appeared in the Coronavirus Aid, Relief, and Economic Security (CARES) act in 2020. After the pandemic caused massive economic derailment and job loss, the government implemented this credit to incentivize businesses to keep their employees on payroll.
The ERC guarantees eligible employers to receive a refundable credit against specific employment compensation.
What is an ERC scam and who is at risk?
ERC scams occur when a scammer contacts a business and offers to assist in their acquisition of the ERC deduction by preparing their tax documents on behalf of the employer. The scammer then has access to sensitive information, such as social security numbers and the finances of the enterprise. Additionally, some may claim to be able to secure larger deductions than they actually can and charge costly upfront fees.
The IRS has been vocal about taxpayers safeguarding themselves specifically from fishy promoters advertising ERC refunds through radio and internet ads. They often claim to be able to secure a larger payout than they actually can, basing their claims on false information regarding eligibility and improper calculation of the credit.
Business owners and those who have employees are most at risk for this type of scam due to eligibility requirements of the credit.
Best practices to avoid ERC scams
When approached by someone claiming to offer ERC-related services, it is crucial to verify the legitimacy of the individual, enterprise, and offer. Business owners should be well-versed in how this credit works and the stipulations it holds. It’s also never smart to share sensitive information with people you do not 100% know or trust. Because at the end of the day, if it sounds too good to be true, it usually is.
Businesses must understand that these credits are not available to everyone. While the credit has been a much needed boost to the financial livelihood of millions of businesses, there are individuals deceiving and manipulating business owners into believing they can claim these credits when they actually can’t. Specific rules and regulations are in place to determine who can qualify for this relief.
Who exactly is eligible for the ERC?
First, the wages in question must be between the dates of March 13th, 2020 and September 30th, 2021. Secondly, the business must have experienced a partial or entire interruption of services as a result of government lockdown orders during 2020 or the first three quarters of 2021. Businesses may also be required to provide evidence of a substantial decline in gross income during 2020 or the first three quarters of 2021. Lastly, you must have qualified as a recovery startup business for the third or fourth quarters of 2021.
For a more in depth articulation of the specificities of qualifying for this relief, navigate here.
Be aware that if you reported wages as a part of payroll costs to obtain Payroll Protection Plan (PPP) loan forgiveness or to receive any other tax credit, they are ineligible to qualify for the ERC.
Penalties and how to report
Falsifying information on tax forms is a serious offense and can lead to civil and criminal penalties.
In line with the Dirty Dozen education initiative, the IRS is encouraging individuals to report tax-related illegal schemes to their department. To report fraud or IRS-related phishing attempts, contact phishing@irs.gov or to the Treasury Inspector General for Tax Administration online or through phone at 1-800-366-4484.
Next Steps
Contact us today to know if you are at risk of falling prey to an ERC scam or to learn more about protecting yourself. Whether you are in the midst of one now, or just want some peace of mind, The Hechtman Group is here to help.
At The Hechtman Group Ltd, we understand that tax laws and regulatory and IRS requirements for real estate are vastly different from other financial services. Rich in industry experience, our CPAs and accountants can guide you through all the necessary steps while also creating best practice opportunities for long-term growth.
The Hechtman Group Ltd specializes in accounting, tax and business consulting services for individuals, small business owners, and entrepreneurs, with expertise in real estate accounting.