IRS Continues Crack Down on False Claims for Employee Retention Credit: Improper Claims Put Taxpayers at Risk of Non-Compliance

The Internal Revenue Service has once again issued a warning to the public, urging everyone to review the Employee Retention Credit (ERC) guidelines thoroughly before claiming the credit.

Third-party promoters continue to aggressively push these ERC schemes on various media platforms, charging exorbitant upfront fees or a cut from the refund amount. And these promotors may not inform taxpayers that the amount of credit must be reduced from the wage deductions claimed on the business’s federal income tax return.

The acting IRS Commissioner, Doug O’Donnell, stated, “While this is a legitimate credit that has provided a financial lifeline to millions of businesses, there continue to be promoters who aggressively mislead people and businesses into thinking they can claim these credits.” He emphasized that anyone considering claiming this credit should carefully review the guidelines. And if their tax professional raises questions about the accuracy of their Employee Retention Credit claim, people should listen to their advice. “The IRS is actively conducting audits and criminal investigations related to false claims, and people need to think twice before claiming this credit.”

Although the IRS has issued multiple warnings about this deceptive scheme, attempts to claim the Employee Retention Credit (ERC) continue during the 2023 tax filing season. Tax professionals say they have been feeling the heat as they’re being pushed by clients to file for these credits improperly.

To combat this issue, the IRS Office of Professional Responsibility is working on additional guidance for tax professionals. This guidance will soon be available to assist these professionals to prevent further fraud attempts.

Taxpayers can avoid getting caught up in this scheme by ensuring they are not filing improper claims in the first place. By refraining from filing improper claims, individuals and businesses can steer clear of any legal and financial troubles.

If your business has already filed an income tax return claiming qualified wages for the ERC, but then also files an employment tax return claiming the same credit, it’s essential to correct any overstated wage deductions. This can be done by filing an amended income tax return. Taking these steps will help ensure that you’re in compliance with IRS guidelines and avoid potential penalties down the road.

Businesses should exercise caution when encountering advertised tax schemes promising unrealistic savings. Taxpayers are responsible for their tax return accuracy, and fraudulent ERC claims result in repayment obligations, penalties, and interest.

The ERC is a refundable tax credit intended for businesses that continued paying employees during the COVID-19 pandemic shutdowns or experienced significant reductions in gross receipts between March 13, 2020, and Dec. 31, 2021. Taxpayers who qualify can claim the ERC for a specific period within those dates on an initial or modified employment tax return.

Employers can qualify for the ERC if they have:

It’s important to note that the ERC is only available to recovery startup businesses in the fourth quarter of 2021. Furthermore, employers who qualify for the ERC cannot claim the credit on wages that were already used to claim other tax credits or reported as payroll costs in obtaining PPP loan forgiveness, regardless of the quarter.