If advertisements about the Employee Retention Credit (ERC) have grabbed your attention, you’re not alone. Scammers have jumped on the opportunity to convince business owners to claim this potentially lucrative tax credit.
Here’s what you need to know about the ERC, who qualifies and how to avoid falling victim to a scam.
What Is the ERC?
As the COVID-19 pandemic wreaked havoc on small businesses, the government established several significant relief programs to help businesses stay afloat.
The ERC, which came about in a federal relief package, aims to help eligible business owners recoup some of their financial losses. The ERC is a refundable tax credit for qualified businesses.
Who Qualifies for the ERC?
Thanks in part to persuasive scammers, there is some confusion as to who qualifies for the ERC. Let’s go straight to the IRS to clarify which taxpayers qualify for this tax credit.
According to the IRS:
“An employer is eligible for the ERC if it:
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Sustained a full or partial suspension of operations limiting commerce, travel or group meetings due to COVID-19 and orders from an appropriate governmental authority or
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Experienced a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021 or
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Qualified in the third or fourth quarters of 2021 as a recovery startup business.”
If you have any uncertainty about whether your business qualifies, consult your CPA for advice before trying to claim the credit.
Why So Much Scamming?
The appeal of the ERC is clear: qualified taxpayers can earn as much as $26,000 for each full-time employee during the life of the credit. It’s no wonder unscrupulous scammers are trying to convince as many taxpayers as possible to claim the credit.
Some of these third-party promoters mislead business owners into believing they are eligible to claim the ERC, often charging an upfront fee for their services and taking a cut of the credit. If a taxpayer’s claim is rejected, the business owner is left out in the cold. And just as bad, these promoters don’t always inform taxpayers that wage deductions claimed on a business's federal income tax return must be reduced by the amount of the credit.
How to Avoid Being the Victim of a Scam
The IRS has issued multiple warnings of ERC scams. In a March 7, 2023 statement, the IRS said, “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.”
Despite the prevalence of convincing scammers, there are a few things you can do to avoid being duped.
- Avoid third-parties who aggressively advertise about the ERC.
- Work with a CPA, preferably one who knows you and your business. They can advise you whether you qualify for the ERC under IRS rules and whether it is advantageous for you to claim the tax credit.
- Fully understand the criteria for who qualifies for the ERC.
Remember, if it sounds too good to be true, it probably is.
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