I have written recently that taxpayers need to beware of “too-good-to-be-true” pitches for the Employee Retention Credit (ERC) and that business owners need to be “eyes open” about whether they qualify for the ERC.
The IRS just recently put forward a new announcement outlining warning signs for business owners and tax exempts for ERC scams. The top three warning signs from the IRS were:
- Unsolicited calls or advertisements mentioning an “easy application process.”
- Statements that the promoter or company can determine ERC eligibility within minutes.
- Large upfront fees to claim the credit.
I would add two more that we see in our work as we are asked by CPAs to review their client’s ERC filing: failure to tie the ERC claim to a specific covid-related government order (an order that had a more than nominal impact on the business or nonprofit). All too often, the promoters are basically citing to vague, general policy or guidance from CDC, OSHA or any other alphabet soup agency. No, no, no. It has to be an order – not a policy or guidance – that is due to covid – and that causes more than nominal impact on the business.
Further, even if there is a covid-related government order – we commonly see a lack of substantiation of how the company was impacted by that order. A company may qualify for ERC, but will have a hard run qualifying and surviving an IRS examination if the impact of the covid-related order is not properly substantiated.
We are beginning to see the early signs of a strong IRS enforcement focus on ERC claims. The knocks on the door will come. For example, the IRS just put out guidance on when you can and cannot claim ERC due to supply chain disruptions.
What To Do – IRS has not arrived but You are Afraid of a Future Visit
If you are reading all this and are now concerned that you may not be walking on the sunny side of the street with your ERC claim – all is not lost. The key is to get help and bring the matter to the IRS before the IRS is knocking.
We have been working with scores of businesses and nonprofits that have taken the ERC with “pop up” shop providers and now are waking up recognizing that all this may be too good to be true. We have had good success in taking a hard look at the ERC claims made – and at times finding that while the company may not qualify at the level originally proposed with the previous provider – the company still may qualify for a lesser amount.
Obviously, in some cases we find that there is no support for the ERC claim. Here, we recommend that you get ahead of the problem – file an amendment either withdrawing the ERC claim and/or paying back the funds. Doing so will help go a long way to avoiding the big bill of additional penalties, interest and legal fees that can quickly pile up. But be sure to have someone reputable look at the claim before you determine to withdraw it.
What To Do — The IRS Has Knocked
If the IRS has knocked – and is making inquiries, asking for support for the ERC claim – all is not lost. We have represented a number of clients in ERC examinations.
From our experience in ERC IRS audits we make sure to secure documentation and information surrounding how the client qualifies well before sitting down with the IRS. In addition, there is a benefit of quickly determining whether there is any merit to the ERC claim – avoid costly and timely examination or litigation – and come to a fair resolution with the IRS.
When it comes to the ERC — it won’t work to just run, hide and hope the IRS will go away. Best to face the music.