The IRS has warned employers to be extremely wary of any third parties who are advising them to claim the Employee Retention Credit (ERC) when they may not qualify. Some third parties have started taking improper positions related to eligibility for and computation of the ERC.
Third parties often charge large upfront fees that are contingent on the amount of the refund, but may not inform taxpayers that wage deductions claimed on the business’ tax return must be reduced by the amount of the credit. If the business filed an income tax return deducting the qualified wages prior to filing an employment tax return claiming the ERC, the business will need to file an amended income tax return to correct the overstated wage deduction.
Businesses are encouraged to be cautious of advertised schemes and solicitations that promise tax savings, that are ultimately too good to be true. Taxpayers are responsible for the information reported on their returns, so improperly claiming the ERC could result in the taxpayer having to repay the credit, as well as penalties and interest.
What is the ERC?
The ERC is a refundable tax credit for businesses who continued paying employees while shutdown due to the pandemic, or had significant declines in gross receipts from March 13, 2021 to December 31, 2021. Eligible taxpayers can 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 full or partial suspension of operations due to orders from an appropriate governmental authority, limiting commerce, travel, or group meetings due to the pandemic during 2021 or the first 3 quarters of 2021
- Experienced a significant decline (at least 50%) in gross receipts during 2020, or a decline (at least 20%) in gross receipts during the first 3 quarters of 2021
- Qualified as a recovery startup business for the third or fourth quarters of 2021
Please remember, only recovery startup businesses are eligible for the ERC in the fourth quarter of 2021. Additionally, for any quarter, eligible employers cannot 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. If you have any questions about your eligibility, make sure you reach out to your accountant before moving forward with any third parties.
To report tax-related illegal activities relating to ERC claims, submit Form 3949-A, Information Referral. You should also report instances of fraud and IRS-related phishing attempts to the Treasury Inspector General for Tax Administration at 800-366-4484.