The IRS continues to issue several warnings about misleading employee retention credit (ERC) scams and they are preparing to increase their efforts now that they have caught up their backlog in other areas. Current IRS commissioner, Danny Werfel recently said this “The amount of misleading marketing around this credit is staggering, and it is creating an array of problems for tax professionals and the IRS while adding risk for businesses improperly claiming the credit. A terrible scenario is unfolding that hurts everyone involved — except the promoters.” If an entity received a PPP loan, this information was open to the public and these firms have been able to not only utilize this information to market and estimate ERC credits to them, they also know which bank the PPP loan was originated from and sometimes make it appear as if the bank is referring them.

Recent memorandum on supplier disruption:

There are three main ways to qualify for the ERC which includes full or partial government shut downs, gross receipts declines, and supplier disruption. The third, supplier disruption, has had a lot of misinformation and advise given to employers, some stating that everyone qualifies because they had “some type of disruption” which is not how the IRS has interpreted the law and will be enforcing it. A recent memorandum has been issued to highlight that employers experiencing supply chain disruptions qualify for ERC ONLY if they had to suspend their business operations because their suppliers were unable to provide critical goods or materials due to a government order that caused the supplier to suspend its operations. Examples in the memorandum show the IRS intentions of who qualifies and who does not. You can read the full memorandum here: https://www.irs.gov/pub/lanoa/am-2023-005-508v.pdf

IRS tips that people should be wary of involving the Employee Retention Credit. Warning signs to watch out for include:

1-Unsolicited calls or advertisements mentioning an “easy application process.”
2-Statements that the promoter or company can determine ERC eligibility within minutes.
3-Large upfront fees to claim the credit.
4-Fees based on a percentage of the refund amount of Employee Retention Credit claimed. This is a similar warning sign for average taxpayers, who should always avoid a tax preparer basing their fee on the size of the refund.

5-Aggressive claims from the promoter that the business receiving the solicitation qualifies before any discussion of the group’s tax situation. In reality, the Employee Retention Credit is a complex credit that requires careful review before applying.

6-The IRS also sees wildly aggressive suggestions from marketers urging businesses to submit the claim because there is nothing to lose. In reality, those improperly receiving the credit could have to repay the credit – along with substantial interest and penalties.
These promoters may lie about eligibility requirements. In addition, those using these companies could be at risk of someone using the credit as a ploy to steal the taxpayer’s identity or take a cut of the taxpayer’s improperly claimed credit. The IRS website to read more about this – https://www.irs.gov/newsroom/irs-alerts-businesses-tax-exempt-groups-of-warning-signs-for-misleading-employee-retention-scams-simple-steps-can-avoid-improperly-filing-claims