The Internal Revenue Service is asking whistleblowers to report on fraudulent claims for the Employee Retention Credit, as so-called "ERC mills" continue to encourage applications for the tax credit from businesses that may not qualify for the pandemic relief program, which was available for 2020 and 2021.
Last week, the IRS warned employers to be wary of third parties who are advising them to claim the ERC (also known as the ERTC for Employee Retention Tax Credit) when they may not qualify, noting that some of them are taking improper positions related to taxpayer eligibility for and computation of the credit. Fraudsters can charge hefty upfront fees or a fee that's contingent on the amount of the refund and may not tell taxpayers that wage deductions claimed on the business's federal income tax return need to be reduced by the amount of the credit. CPAs have been getting pitches from such purveyors and are warning about the fraud as well (
ERC "mills" have come out of the woodwork to lure small business owners into taking a lucrative tax credit they don't qualify for. Here's what advisors need to know.
"Businesses are encouraged to be cautious of advertised schemes and direct solicitations promising tax savings that are too good to be true," said the IRS. "Taxpayers are always responsible for the information reported on their tax returns. Improperly claiming the ERC could result in taxpayers being required to repay the credit along with penalties and interest."
The ERC is a refundable tax credit designed for businesses who continued paying employees while shutdown due to the COVID-19 pandemic or had significant declines in gross receipts from March 13, 2020, to Dec. 31, 2021. Eligible taxpayers are able to claim the ERC on an original or amended employment tax return for a period within those dates.
To be eligible for the ERC, employers must have:
- sustained a full or partial suspension of operations due to
orders from an appropriate governmental authority limiting commerce, travel or group meetings due to COVID-19 during 2020 or the first three quarters of 2021; - experienced a
significant decline in gross receipts during 2020 or adecline in gross receipts during the first three quarters of 2021 ; or - qualified as a
recovery startup business for the third or fourth quarters of 2021.
Only recovery startup businesses are eligible for the ERC in the fourth quarter of 2021. For any quarter, eligible employers can't claim the ERC on wages that were reported as payroll costs in obtaining PPP loan forgiveness or that were used to claim certain other tax credits.
To report tax-related illegal activities relating to ERC claims, the IRS is asking tipsters to submit
The American Institute of CPAs applauded the move Monday and has been warning CPAs about the bogus credit mills in recent town hall meetings (
The AICPA noted that the form -
The ERC was established nearly three years ago as part of a larger COVID-19 relief package to help businesses get through the pandemic, but recently, the AICPA has heard from members concerned with the rise of non-CPA firm ERC vendors taking inappropriately aggressive positions. The companies submit claims on behalf of businesses that are either unknowingly unqualified or qualified for a much smaller credit, charging upfront contingency fees of up to 25 percent of the claimed credit. These claims, if they're audited by the IRS, could lead to drastic reductions to the improperly obtained credits, costing the business a significant amount of money.
"For more than a year, the AICPA has communicated its concerns to the IRS and the Department of the Treasury regarding the unscrupulous business practices of ERC mills, and we are encouraged by this acknowledgement by the IRS of these questionable business practices around the ERC," said AICPA president and CEO Barry Melancon in a statement Monday. "This credit has been hugely beneficial to countless businesses that struggled to navigate the challenges brought on by the pandemic, and CPAs have often advised clients and business owners against taking the improper recommendations of these third-party vendors. We are pleased that employers and others now have a mechanism to anonymously report bad actors and help to protect the public against them."
