Too Good To Be True? Beware of ERC ScamsMarch 9, 2023
Recently the IRS has issued several warnings to employers to beware of third parties promoting improper Employee Retention Credit (ERC) claims.
The ERC was enacted as part of the 2020 CARES Act for employers who continued paying their employees during the shutdown due to the COVID-19 pandemic, or who experienced significant declines in gross receipts from March 13, 2020, to December 31, 2021.
To be eligible for the ERC, generally employers must have either:
- Sustained a full or partial suspension of their business operations in compliance with orders from a governmental authority limiting commerce, travel, or group meetings due to COVID-19 during 2020 or the first three quarters of 2021, or
- Experienced a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021 because of COVID-19.
The amount of an employer’s eligible ERC depends on several factors, including the number of employees, the amount of the employer’s payroll and gross receipts, and whether the employer paid any sick or family leave wages. The amount of the ERC reduces the employer’s allowable wage deduction on its income tax return. In addition, while eligible employers are able to claim the ERC even if they received a PPP loan, care must be taken to not claim the ERC on wages that were reported as payroll costs in obtaining PPP loan forgiveness.
The IRS has been warning employers that some third-party advisers are urging employers to claim the ERC without informing them of limitations on eligibility and the correct computation of the credit. Often this advice—for which these third-party advisers usually charge hefty upfront fees or a fee contingent on the amount of the refund—has led some employers to claim excessive ERCs based on improper positions. The IRS is urging affected employers to file amended returns to correct excessive ERC claims and minimize interest charges and/or penalties.
The IRS Criminal Investigation Division and the US Department of Justice have initiated criminal investigations, and in some cases indictments, against promoters of excessive ERC claims.
The IRS has up to five years to audit ERC claims, which is two years longer than the typical three-year statute of limitations for income tax returns. This two-year difference could create a whipsaw effect for employers where an employer could lose otherwise available wage deductions in computing taxable income in years closed under the statute of limitations and a disallowed ERC, penalties, and interest.
If an employer has questions about their ERC claim, and thinks that it may have been “too good to be true”, because they relied on erroneous or improper advice from a third-party provider, the employer should consult with their CPA regarding this possible overstated claim and discuss any additional tax, interest, and/or penalties that might apply. If requested, the CPA can assist the employer in correcting or mitigating the problem.
Greg is the Managing Partner at Larson & Company. He is a tax and tax provisions subject matter expert.