ERC Newswire

By ERCbee, November 17, 2022

In March 2020, when eyeing down immense global uncertainty and the earliest days of lockdown, the U.S. government swiftly passed a series of sweeping pandemic-related relief provisions, bundled together as the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Within that bundle was the Employee Retention Credit (ERC), a lucrative benefit aimed at supporting and rewarding small-to- midsize businesses that chose to keep their staff on payroll rather than pursuing layoffs — as so many companies were forced to do under the rising economic pressures of the pandemic. 

The goal was to provide the resilient business owners and employers who trudged on despite the difficulties with immediate emergency disaster relief in the form of a refundable tax credit for every employee retained. Now, nearly three years since the legislation was enacted, hundreds of thousands (and potentially millions) of businesses are anxiously awaiting their overdue ERC refund checks, with countless others still applying for the benefit retroactively. 

Unfortunately, due to several competing factors including major gaps in IRS oversight, deeply deficient internal controls, and a rise of fraudulent claims (11,096 suspicious returns claiming more than $2 trillion in ERC refunds have been flagged by the IRS as of March 2022), some of those businesses may never see their emergency funds — and others are primed to undergo an extensive audit upon receipt. 

Here we will explore how bad actors and misinformation surrounding what was meant to be a good- faith benefit for small businesses could likely lead to one of the largest tax scams in American history, and how to ensure your business does not end up on the wrong end of the shuffle in claiming the credit you are owed.

1.   Understand What the ERC Is

The ERC is a refundable tax credit for businesses who continued paying employees while shutdown due to the COVID-19 pandemic or had significant declines in gross receipts from March 13, 2020 to December 31, 2021. After being signed into law in March 2020, the credit was later expanded upon with the Consolidated Appropriations Act in December 2020 and the American Rescue Plan Act in June 2021. The program ended when the Infrastructure Investment and Jobs Act was signed into law in November 2021. One of the legislation’s three amendments allows eligible taxpayers to claim the credit retroactively on an original or amended employment tax return for a period within the qualifying dates.

2.   Confirm You Truly Meet All Qualifications

Given the complexity of the tax code, the shifting requirements of the program, and woefully ill- prepared IRS systems for managing ERC claims, many businesses have not yet been able to capitalize on this opportunity, while others have been duped into submitting erroneous claims by suspicious third-party “ERC mills” that claim a business meets the requirements — when, in fact, it does not.

To be clear, qualifying businesses include those who (1) have 500 or fewer employees, (2) were required to fully or partially suspend operations tied to government orders, (3) saw revenue reduce by 20% or more for any given quarter within the qualifying periods, (4) were required to limit office space occupancy due to social distancing mandates, (5) were unable to obtain critical goods, materials, or supplies due to shutdowns, (6) had employees who were prevented from going into work due to shelter-in-place orders, and/or (7) started a business after February 15, 2020 that had annual gross receipts totaling less than $1 million — all while keeping employees on payroll despite these drastic disruptions. Those who qualify can claim up to $26,000 per employee retained, amounting to multiple millions of dollars for some eligible companies. 

Given how lucrative the highly publicized plan is for such a huge swath of American business owners, it’s unsurprising — though certainly disappointing — that it also presented a prime opportunity for fraudsters to cash in. According to a recent report published by the Treasury Inspector General for Tax Administration (TIGTA), more than $2 trillion in suspicious ERC refunds has been flagged by the IRS; an exponentially higher sum than the $2 billion in tax evasion charges that earned billionaire tech entrepreneur Robert T. Brockman the residing “biggest tax fraud case in American history” title in 2020.

Many of the bad actors who contributed to that number were self-proclaimed “ERC specialists” who would leverage aggressive marketing campaigns that glossed over the strict requirements for claiming the credit without warning business owners of any of the potential consequences they would face if found to be ineligible after filing. To make matters worse, many weren’t even licensed accountants or qualified tax professionals. Bolstered by the virtual worlds and remote business dealings we’ve all become accustomed to throughout the pandemic, these fraudsters only needed a semi-reputable looking website, an email address, passable fluency of the ERC lingo, and a phone number for consultations to execute their trick on unsuspecting Americans. 

3.   Gather the Proper Documentation to Avoid an Unnecessary Audit

After you confirm that your company qualifies for the ERC, it is not enough to simply file the Form 941 or Form 941-X (Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund) and wait for your check to arrive, given the likeliness that these filings may now lead to a future audit. Be wary of any third-party that may suggest otherwise, especially if they are asking for a large fee upfront to begin the process “for you.” The Inflation Reduction Act (IRA) that was just signed into law on August 16, 2022 by President Biden has allocated nearly $80 billion in new IRS funding, with more than half ($45.6 billion) earmarked for enforcement of mission-critical functions — including pandemic relief benefits. If you choose/chose to file for the ERC, it behooves both you and your business to gather any/all documentation that can prove, measure, and quantify that your claim meets all of the necessary requirements. The more evidence you can gather, the better positioned you will be for any future IRS action that may occur. (Remember, if you truly qualified and filed your claim appropriately, the funds you were allocated are rightfully yours and covered by law through the CARES Act).

Per recent warnings from the IRS, if your business filed an income tax return deducting qualified wages before you filed an employment tax return claiming the ERC, you should also file an amended income tax return to correct any overstated wage deduction.

4.   Hire an Experiences CPA or Accredited ERC Advisor/Team to Assist

There’s a reason it takes a true specialist to be able to assist civilians with complex tax claims. With over 70,000 pages of state and federal tax codes that are constantly being updated, it’s nearly impossible to master all of them. Even seasoned CPAs have been overwhelmed by the logistics of the CARES Act provisions, and many have chosen not to process ERC claims. Think of the difference between your family doctor and, say, a neurologist. When dealing with a hyper-nuanced brain condition and treatment protocols that change frequently without warning, you’ll likely elect to work with the specialist if you want to achieve the best possible outcome. The same is true for these pandemic relief programs. If you are a small or midsize business that kept your employees on payroll throughout the pandemic, it has never been more important to partner with a credentialed CPA who is familiar with the ERC or a team of trustworthy ERC experts while claiming your refund. To see whether your business qualifies, please schedule a consultation with one of our specialists by visiting www.ercbee.com or calling our office today.