When someone tells you the government is giving away a pile of free money, sometimes the claims are, in fact, too good to be true. The IRS is taking a closer look at fraud cases related to the Employee Retention Credit (ERC), after getting through a backlog of applications related to the pandemic relief program.
“The further we get from the pandemic, we believe the percentage of legitimate claims coming in is declining,” IRS Commissioner Danny Werfel said at the IRS Nationwide Tax Forum in Atlanta in late July. Instead, Werfel said, the IRS is seeing “more and more questionable claims coming in following the onslaught of misleading marketing from promoters pushing businesses to apply.”
The IRS says contractors offering tax preparation services, rather than companies filing for ERC credits themselves, are a source of illegitimate claims. These contractors engage in “false and misleading public advertisements and scams taking advantage of taxpayers,” according to an IRS post.
The IRS wrote of concerns that companies might be led to make illegitimate claims by some firms: “Unscrupulous promoters may lie about eligibility requirements, including refusing to provide detailed documents supporting their computations of the ERC.”
Finance professionals should be on the lookout for several elements of scams that the IRS identified: if the contractor claims a company is eligible for the ERC before examining its records, offers an easy application process, promises to determine eligibility within minutes, and charges large up-front fees. Companies should also be wary if the contractor who prepares the ERC claim isn’t willing to sign it, the IRS warned.
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According to the IRS, the scam works like this: A scammer says there’s a larger credit available to a company than there really is, and then charges a large fee or a percentage of the credit as a result, but can escape liability by not signing the paperwork. The company ends up on the hook for paying back any credits it received from the IRS that it did not qualify for, plus fines and interest, while the preparer may not face the same financial risk.
The IRS notes that there are multiple ways that ERC credits can be made to appear larger than they should be, including failing to explain that the eligibility window is very narrow, not explaining that offsetting a certain amount of wage deductions in a tax return is required to account for the ERC credit, or possibly claiming the ERC on PPP-related payroll costs.
The IRS offers a three-step approach to verifying your ERC claims are legitimate: Work with a trusted tax professional, request the details explaining your ERC eligibility, and “Don't apply unless you believe you are legitimately qualified for this credit.”