A new wave of advertising is churning up interest in a tax credit intended to help businesses and non-profits that tried to retain their employees during the COVID-19 pandemic. However, the ads on TV and radio, online, and even direct mail leave out a critical fact: most of the promoters’ clients won’t qualify for the credit.

That’s where you come in.

As a trusted tax professional, you are often the source of truth for your clients. You may be getting questions about ads touting big payoffs for claiming the Employee Retention Credit (ERC). If these stories sound too good to be true, that's because they are.

We want you to have all the facts, so your clients can make the right decisions.

Be wary of unrealistic claims for the ERC

To hear one of these ads, you’d think virtually anyone can claim the ERC: businesses, non-profits and individuals alike. In addition, they say “you have nothing to lose!” Both these statements are false.

True, the ERC is a refundable credit, but it is intended for businesses that continued to pay workers even while they were shut down during the pandemic. The credit also applies to businesses that had significant declines in gross receipts during the specified eligibility periods. And no matter what the ads say, individuals are not eligible for the ERC.

As far as filers having “nothing to lose,” consider that anyone who improperly claims the ERC has to pay it back—many times along with penalties and interest. The IRS cautions businesses and tax-exempt organizations that they could find themselves in a much worse cash position if they have to pay back the credit than if they never claimed it in the first place.

What are the requirements for claiming the ERC?

Companies can claim the credit on an original or amended employment tax return for qualified wages paid between March 13, 2020, and Dec. 31, 2021.

To be eligible, employers must have:

• Carried out a full or partial shutdown of operations as ordered by an appropriate governmental authority because of Covid-19 during 2020 or the first three quarters of 2021;
• Experienced a significant decline in gross receipts during 2020 or during the first three quarters of 2021, or;
• Qualified as a recovery startup business for the third or fourth quarters of 2021.

How can clients know if an offer could be a scam?

First, the offer comes through an advertisement or an unsolicited phone call. Either may promote an “easy application process.”

Second, promoters will often claim they can determine the filer’s ERC eligibility within minutes, but charge a large up-front fee just to claim the credit. Many times, promoters will claim a business qualifies for the credit without any discussion of the client’s tax situation.

Finally, promoters’ fees tend to be based on the amount of ERC being claimed.

You are the best defense against ERC scams

The IRS says you, the trusted tax professional, have the skills needed to correctly determine eligibility for the Employee Retention Credit and to calculate the correct credit amount. These third-party promoters have only profit as their motive and cannot be trusted to act in taxpayers’ best interests.

To report abuse of the Employee Retention Credit, submit a Form 14242, Report Suspected Abusive Tax Promotions or Preparers, mailing or faxing the completed form along with any supporting materials to the IRS Lead Development Center in the Office of Promoter Investigations at:

Internal Revenue Service Lead Development Center
Stop MS5040
24000 Avila Road
Laguna Niguel, California 92677-3405

Fax: 877-477-9135

Source: IR-2023-105