Don’t get hoodwinked by Employee Retention Credit (ERC) scammers.

November 7, 2023

The closure forced upon many American businesses during the COVID-19 pandemic is now, unfortunately, paving the way for large-scale fraud through the tax credit that was designed to help them stay in business. The Employee Retention Credit (ERC) was developed to save businesses who paid their employees at the beginning of the pandemic despite significant revenue losses caused by the government mandates. Even with strict eligibility requirements, many small and mid-size business owners have been mistakenly led to apply for the credit by unscrupulous ERC scammers.

This article discusses:

  • The purpose of the ERC
  • Its eligibility requirements
  • How businesses are misled into applying
  • How to avoid the deceptive practices of unregulated ERC promoters
  • What to do if you are a victim of this type of scam.

What is the Employee Retention Credit?

Following the government's mandate to close non-essential businesses starting from March 12, 2020, many business owners faced significant challenges in maintaining their operations and livelihoods. Regrettably, a substantial number of businesses remained closed and did not reopen.

The ERC, also referred to as the Employee Retention Tax Credit (ERTC), is a refundable tax credit available to businesses and tax-exempt organizations that had employees and were significantly impacted by the COVID-19 pandemic. Designed to help employers retain their workforce through the COVID-19 crisis and cover some of their losses, the ERC has become an unfortunate magnet for fraud and unqualified applications. The potential for large monetary claims sparked an influx of non-regulated ERC “experts” advising business owners to apply without regard for the consequences of their deceptive practices.

What are the ERC Eligibility Requirements?

To better grasp how this credit could be of aid, it's vital to understand both the timeline of these challenges and the eligibility parameters outlined by the IRS. Eligibility and credit amounts depend specifically on when and to what extent the impact on the businesses occurred during the pandemic. According to the IRS website, general eligibility requirements are as follows: 

  • Employers that were shut down by a government order due to the COVID-19 pandemic during 2020 or the first three quarters of 2021
  • Employers that experienced the required decline in gross receipts during the eligibility periods during 2020 or the first three quarters of 2021
  • Employers that qualified as a recovery startup business for the third or fourth quarters of 2021

There are some limitations to the ERC. For example, employees’ wages that were reported as payroll costs for the Paycheck Protection Program loan forgiveness do not qualify for the ERC nor do payroll costs connected with shuttered venue operator grants or restaurant revitalization grants.

Unfortunately, in their haste to create tax relief that supported employers, the ERC has become well known for widespread misuse and fraudulent claims mostly due to aggressive marketing tactics from questionable entities the IRS has termed “ERC mills.” These mills misrepresent and misguide business owners into applying for the credit when they do not actually meet the requirements. 

How ERC mills deceive businesses into applying for the credit. 

The aggressiveness of ERC mills who hoodwink uninformed employers into pursuing the tax credit underscores the urgency of informing potential filers about the explicit eligibility requirements and the associated liabilities. In addition to shady tactics, the mills propagate excessive marketing efforts that fail to adequately address the risks to the business owner.  Furthermore, these entities often demand a significant portion of the credit in upfront costs and fees (in some cases, upwards of 25-30 percent) or manipulate the payment structure on a contingent basis.

Consequences of improperly receiving the ETC. 

As with all tax fraud, the penalties for misrepresenting your business with the IRS are steep. If your company improperly applies for and receives the credit, it may be obligated to repay the credit in full, along with accrued interest. Not to mention, the initial upfront costs and contingency fees charged by the ERC promoters. 

How to avoid being hoodwinked by deceptive mills. 

Here are warning signs listed by the IRS that can help you avoid being scammed by duplicitous ERC mills: 

  • Advertisements featuring an "easy application process" or “instant eligibility approval” or any other too-good-to-be-true language.
  • Upfront or excessive fees to claim the credit.
  • Contingency fees based on the refund amount claimed. In fact, you should avoid any kind of tax preparer who bases their fee on the size of the refund, as this is considered unethical practice.
  • Preparers who refuse to sign the ERC filing or to supply their identifying information and a tax ID number. There is probably a deceptive reason they are unwilling to cooperate.
  • Impetuous claims that your business qualifies for the ERC without any discussion of your current tax status. The reality is the ETC is a complex credit that requires careful consideration before applying.

If you are feeling the urgent push from unsolicited callers promoting “easy access” and “instant eligibility” to the ERC, first acknowledge the urgency and the accuracy of their claims are designed to make you jump into hasty action. Instead, take time to seek advice from trusted advisers. Make sure that you have your adviser review your application before submitting it. You want them to ensure that your filing and claim numbers are accurate and fit within the eligibility requirements. Do not take advice from smarmy marketers who base their payment fee off of the amount of credit received. That practice is unethical and puts your company at significant risk. 

What to do if you are a victim of the ERC mills:

If you have fallen victim to these deceptive practices, there are two options to take, depending on the status of your claim. 

  • If you have received your credit: The IRS will provide additional guidance this fall (2023) to help employers who were misled into claiming the ERC and have already received the payment. Check for more information.
  • If you have not received your credit: You may be able to withdraw your claim following the directions given by the IRS. Click here to withdraw your ERC claim. Businesses should be aware that for those who have willfully filed fraudulent claims or those conspired to do so, withdrawing a fraudulent claim will not exempt them from potential criminal investigation and prosecution.

The ERC is a legitimate tax credit that should be claimed with caution.

Syndeo's cautious approach to submitting ERC claims for our PEO clients is primarily due to the substantial risks associated with the process. Remember, the window for these tax credits is winding down. Even with the IRS moratorium on filing claims that took effect in September 2023, making sure that your business meets all the eligibility requirements is paramount. Avoiding dishonest, fraudulent ERC mills pushing clients to file credits that they do not qualify for is essential to protect your business's financial integrity and reputation, as well as to prevent potential legal consequences. 

If your business meets the eligibility requirements, the ERC can be a legitimate way to recoup some of the costs of the devastating pandemic. But you are wise to pursue them with caution and at the advice of a trusted professional adviser. 

What aggressive marketing tactics have you experienced from ETC promoters?

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