It’s about two weeks until the personal tax extension deadline so ERC scam businesses are pretending to be Superman, sliding into your DMs and earholes with a promise of saving your small business and providing a better future for your heirs. $26,000 per employee! They exclaim. If you have 100 employees that’s like $2.6 million! But understand where that message is coming from.
No one is just dishing out $26k per employee, so be very skeptical of the messenger. Who is this person and what does he have to gain from this?
Yes, the ERC program was super beneficial for some businesses two years ago and even last year as they were just getting their head above water and recovering from the pandemic. These scammers are using the cloudiness of going through a pandemic to find vulnerable individuals that they can take advantage of. Unfortunately, most people didn’t qualify for the ERC and they don’t now either.
Why? Because their business has increased in revenue. The first qualification of the ERC is that you need to show a decrease in sales for the quarter that you were claiming compared to the period of time last year or in 2019. For example: in 2020, you’d look at sales from Q3 (July – Sept) 2020, compared to Q3 2019. And if you didn’t show that you dropped in sales by more than 25%, there’s no credit available to you. Even if you paid a million in wages and hired half of the town. On the other hand, if you did show a drop in sales by more than 25% you have to look at the payroll that was paid during that third quarter of 2020. And you need to remove the wages that you used to get your PPP loan forgiven. Because you can’t use the same wages that you use for PPP forgiveness to also get the Employer Retention Tax Credit.
You see the ERC was created at the same time as the PPP. And the very first iteration of the programs only allowed businesses to take advantage of one or the other. Since most people laid off workers in mid-March, when the program was created in April 2020, it didn’t make sense because that credit was based on wages paid during the period and you could take the credit while filing your payroll tax returns. Since the world wasn’t ready to open up yet, everyone went after the PPP loan because you had more control over the money, and when it was paid out and you could use it on more than just employee wages. But for the ERC, if employers continued to pay their employees during the initial shutdown of the pandemic anyway, this program was better for them to take advantage of. They were able to look back at those pay periods and get a credit of up to 50% of the employee’s payroll wages that they paid (it was capped at a certain amount and owners are not included). This would allow them to avoid having to get a PPP loan from the SBA through a bank, and then having to apply for forgiveness, which was scary to think about at the time because no government agency had ever facilitated a program with such magnitude, moving parts, and changing legislature as we faced with PPP #1, PPP #2 and the ERC program.
Instead, the ERC allowed them to use wages already paid, and they calculated the credit due to them based on that, as they were paying out payroll. But one of the bills that passed subsequently as the pandemic wore on, changed the rules from the option of “choose a program, PPP or ERC” to “as long as they weren’t the same wages, and your business qualified for the ERC based on a drop in sales in the quarter when wages were paid (or because the area where your business is was shut down by a government) you can take advantage of the PPP and the ERC”. How nice!
But that’s been the case since late 2020. None of that has changed. Honestly, the only thing that has changed since we started evaluating the ERC program for all of our clients is that the audits of this program have increased significantly. The IRS ran a pilot program in July and August 2022 and recovered enough money from fraudulent claims that they are now turning 80 to 90% of their examiners to work on these ERC audits. The workloads are already assigned and they’re waiting on agent training to finish in October and November. It also means that in addition to those who filed fraudulent ERC claims, fines and penalties will also be assessed on whoever prepared those and whoever promoted or marketed the program to the business.
Just like everything in taxes, this is a voluntary system, so when you amend your payroll tax forms to claim that you are owed the ERC, you’re voluntarily declaring to the IRS that your business was able to qualify for the ERC program and is owed money as a result.
So it’s very important to understand that just because someone emails you and tells you that there’s a credit available and you qualify for it. And just because your payroll company doesn’t blink an eye because they’re just going to do what they’re told based on whatever you emailed them, doesn’t make the filing accurate and it doesn’t make it correct or legal. You’re still filing a fraudulent tax return whether you understood that at the time or not. The person who emailed you, who is likely taking a 20% commission upfront knows that it’s probably not legit calculations but they’re going to take that gamble that the IRS will never call them on it.
It doesn’t hurt to ask your accountant about this program and whether or not they looked into it for you but I truly hope they did, at some point in the last two years. It is not a new program. We’ve known about this program since April 2020 and since then nothing is changed except for the ability to use it in conjunction with PPP loans. It’s not free money and it’s only available to businesses that truly struggled during the pandemic by having a loss of sales, AND also kept employees on payroll.
Here are some tips to know if you’re being scammed in an ERC scam.
- You are getting pounded over the head with emails, calls, radio ads, and TV ads about a NEW tax credit program.
- You asked your accountant if you qualify and they told you no, but the ERC scammer tells you you do qualify.
- Your accountant prepares your ERC claims and comes up with one number, but your ERC scammer did their own calculation and comes up with a different number. That’s much higher than your accountant’s.
- The ERC scammer fails to provide assurance on defending their work in case of an IRS audit.
- The ERC scammer pretends to be associated with established providers but offers no validation to that claim.
- The ERC scammer won’t sign their own name to a document and will only “help” you fill out the forms or come up with the calculation.
- The ERC scammer establishes a specific amount of credit that you are owed without thoroughly reviewing all of the relevant sales and payroll information.
- The ERC scammer takes a percentage of the refund that you receive and asks for it up front while you wait weeks if not months for your credit check in the mail. (Your accountant and payroll company SHOULD charge a small fee for their work, but the calculation shouldn’t take more than one hour for a business with up to 25 employees. There is no reason anyone should be taking a percentage of the refund, it’s a very straightforward calculation, and it’s not up for interpretation.) That way of doing business screams SCAM to me.
I agree that it stinks that you hear about stories of people getting tens of thousands of dollars in credits refunded to them but there are two things going on here. They are either doing something that is illegal or they have TERRIBLE advisors who missed the credit two years ago, which isn’t something to brag about. And filing fraudulent paperwork with the IRS is NEVER something I want on my resume, I’d hope we share that goal.
Some businesses didn’t qualify for the ERC but since there are no supporting documents required for the IRS to verify the credit calculations before issuing a refund check, you only have to show your work if they come knocking on your door to audit you. A lot of business owners have gotten away with fraudulent claims and will continue to. But that doesn’t mean that’s the approach that you should take.
Everyone is their own risk tolerance, and until you get caught, you will get away with it. But the IRS is getting smarter and while they have no way of knowing your sales by individual quarter, they do have access to your total sales data for the years to compare them, and they also have access to the amount of payroll that you paid in each year compared to the credit you requested. So if those metrics are off and they know you got an ERC, expect to have those supporting documents nice and tidy for a young and chipper IRS agent looking to make a name for himself and stand out among his peers.