Employee Retention Credit: U.S. business owners, beware of third-party vendors who promote bogus payroll tax credit for refund
The Internal Revenue Service (IRS) would like you to be wary of third parties who may promise to get you a little-known payroll tax credit that can result in thousands of dollars per employee cash credit: the Employee Retention Credit (ERC). The ERC is a refundable payroll tax credit that Congress enacted to help businesses impacted by the Covid-19 crisis keep their employees on payroll.
An increased number of vendors are taking inappropriately aggressive positions to get employers the employee retention credit (ERC). They may tell you that you’re eligible for the ERC while they know that you are not. If you’re eligible for the credit, some others may exaggerate the amount of credit that you’re entitled to, for their own benefit.
WHO THEY COMMONLY ARE?
Typically, these vendors are not Certified public accountants (CPAs), tax attorneys. Often, they pause as “ERC experts” or “ERC Consultants”. But they are sales and marketing professionals who don’t have any official designation.
HOW DO THEY TYPICALLY OPERATE
ERC mills have unscrupulous business practices. They can lure you to do the following:
- Payment upfront of a percentage of the payroll tax credit claim for refund: their bill may be as much as 25% of the amount of credit that they’re claiming for you. You may not get the upfront fees that you paid to them if your claim is denied.
- Omission of important steps: they won’t tell you that you need to reduce the salary expenses that you’ve deducted on your business’ federal income tax return by the amount of the ERC tax credit claim.
WHAT ARE YOU RISKING
If the IRS audits your business, the federal tax agency may:
- Deny the ERC that you improperly obtained, or
- Reduce drastically the amount of ERC that you improperly obtained. You would have to repay all or part of the credit that you received along with penalties and interest.
In addition, you would need to:
- File an amended income tax return to correct any overstated wage deduction if you filed an income tax return and deducted qualified wages before you filed a payroll tax return to claim the ERC.
Note: you would lose the upfront fees that you paid to the purported “ERC experts”. In addition to wasting your valuable time, you would lose your money.
WHAT YOU SHOULD DO
Aimlon CPA P.C. tax professionals encourage you:
- To use common sense principles in selecting your ERC service professional and ultimately to decide to pursue the ERC or not
- To be cautious of third-party vendors who are promoting tax savings that are too good to be true.
You are always responsible for the information that is reported on your business’ tax returns.
REPORTING PROCESS
The IRS encourages you to report
- Tax-related illegal activities regarding the ERC by submitting Form 3949-A, Information Referral.
- Instances of fraud and IRS-related phishing attempts to the Treasury Inspector General for Tax Administration at (800)-366-4484
The ERC is a refundable tax credit designed to help businesses keep their employees on payroll during the period where they were required to close due to the Covid-19 pandemic, or they experienced significant declines in revenue between March 13, 2020 and December 31, 2021.
If you’re eligible for the ERC, you may claim the credit on an original payroll tax return or on an amended one.
To be eligible for the ERC, you must have:
> Sustained a full or partial suspension of your operations due to orders from an appropriate government 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 a decline 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. Learn more
If you’re not a recovery startup business, you cannot claim the ERC for the fourth quarter of 2021.
If you’re eligible for the ERC, you cannot claim the ERC on wages that were reported as payroll costs in obtaining the Paycheck Protection Program (PPP) loan forgiveness or that were used to claim certain other tax credits.