US IRS Building Front doors

IRS Warns Employers of ERC Scams on 2023 Dirty Dozen

Reading Time: 5


Employee Retention Credit Scams Become More Prevalent

Last October, the Internal Revenue Service advised businesses to proceed with caution when engaging with tax credit companies instructing them to claim Employee Retention Credits they may not qualify for. Some third-party tax credit specialists have submitted incorrect ERC claims on behalf of unknowing clients, many of which amount to ERC fraud. The IRS recently renewed this warning with even more urgency by placing ERC scams on their annual Dirty Dozen list.

Most ERC scams are perpetrated by cottage-industry companies that rush to process your ERC credit without proving your business truly qualifies. Even worse, some will overclaim your credit in order to pocket a larger amount from your ERC refund. Most firms that practice Employee Retention Credit scams started up in the last two years specifically to abuse the ERC program. Should your business be audited in the future, these ERC scammers will not be around to account for their work.

By naming ERC scams on their 2023 Dirty Dozen, the IRS newsroom’s annual list highlighting the most prevalent tax scams of the year, officials are signaling that ERC scams have become more prevalent since their initial warning in October 2022. The new summary report warns taxpayers and business owners to be aware of “blatant attempts by promoters to con ineligible people to claim the credit.”

The IRS is now beginning to conduct routine reviews in order to spot these questionable claims. In the original IRS news release, Washington officials affirmed that businesses are always liable for their tax reports, and any company involved in an Employee Retention Credit scam will be responsible for future repayment with penalties and interest.

IRS Auditors crackdown on Employee Retention Tax Credit abuse fraud scams
The IRS is now conducting ERC audits to crack down on third-party tax credit providers that may be practicing Employee Retention Credit fraud. Read on to learn how to determine if your tax credit specialist is trustworthy.

Is the ERC Credit Legit?

In and of itself, the Employee Retention Credit is not a scam. The ERC is a legitimate payroll tax credit still accepted by the IRS today. Created by the CARES Act to incentivize employers to retain workers throughout the pandemic, the ERC can still be claimed retroactively by amending payroll taxes from 2020 and/or 2021.

While the ERC is a real tax credit providing real tax refund checks to companies across the country, many illegitimate ERC scam companies advise businesses to claim credits they may not be entitled to.

The prevalence of ERC scams places business owners in a tough predicament. Businesses that survived the pandemic need access to the ERC refunds they’ve earned. But claiming the credit with the wrong provider could land the business in hot water with the IRS. Selecting an honest and trusted ERC provider is a paramount decision for business owners today.

Employee Retention Credit Scam Alert

By now, you have probably encountered an ERC advertisement on the radio or internet. ERC ads typically tout the maximum credit of $26,000 per employee. Many of these ads come from legitimate companies that service multiple tax credits with accuracy and integrity.

However, some inexperienced “ERC specialists” have popped up in the last year or two that seek to maximize their commissions at your expense.

How Does ERC Fraud Work?

Employee Retention Credit fraud is perpetrated in a few different ways. Some ERC providers make it standard practice to stretch the limits of tax law. Some may conduct honest work but take advantage of unsuspecting clients to pad their profit when the opportunity arises. In other cases, ERC fraud is committed unknowingly by in-house bookkeepers or accountants who lack experience with the ERC.

According to the 2023 Dirty Dozen summary report, a smaller number of ERC fraudsters “…exist solely to collect the taxpayer’s personally identifiable information in exchange for false promises. The scammers then use the information to conduct identity theft.”

Many tax credit providers offer to determine whether your company qualifies for the ERC free of any up-front charges, instead taking a percentage of your tax refund once it is processed. The company will collect your relevant tax documents, conduct their due diligence, and make the necessary ERC calculations — and they may find your business ineligible for the ERC.

At this point, they have invested significant man-hours in your case for no payment in return. Unwilling to take the loss, ERC scam companies will instead claim that you do qualify, without providing the necessary evidence to the IRS. Unaware of this, you will be happy to learn you qualify for a sizable ERC refund check and send a percentage of it to your service provider. But if the IRS investigates your claim or your company is audited, you could be subject to tax penalties and interest.

If you encounter an Employee Retention Credit scam, you can report the information to the IRS using Information Referral Form 3949-A.

Will Your ERC Stand Up Against IRS Auditors?

Claiming the Employee Retention Credit requires more analysis than just your payroll records — it’s not just a simple calculation and objective qualifications. Claiming the ERC involves open-ended eligibility guidelines that require employers and tax credit servicers to make subjective decisions that have serious financial implications. Partial suspensions, more than nominal impact, and other variables are all open to interpretation. This subjectivity makes the ERC susceptible to misjudgment, abuse, and even fraud.

Because of this gray area, the IRS will likely treat larger ERC claims with extra scrutiny. Claiming this tax credit without documented evidence will leave you vulnerable in a future IRS audit — especially if your ERC refund amount is in the millions.

Is ERC legit? how to prove ERC qualifications and employee retention credit eligibility in IRS Audit
Which is more important to the long-term health of your business: getting a large ERC refund check now, or keeping all of your ERC refund down the road?

You Need Documentation Showing Your ERC Qualifications

Would you be able to remember each of your ERC qualifications several years from now? Keeping a detailed record of each ERC calculation and decision is the key to avoiding tax penalties. You must have an airtight document justifying your ERC claim that you can reference in an audit. If you qualified with declined revenue, you need your P & L statements on record. If you own multiple companies, you must show you aggregated the business’ income. If you qualified because a government order impacted your business operations, you need a record of the relevant orders and proof of your modified operations. 

If your payroll provider or tax credit specialist filed the ERC on your behalf, you must ensure they provide you with such documentation. ERC providers who do not provide these audit-defense documents are, at best, leaving their clients at risk. At worst, they are running an ERC scam.

IRS Auditors crackdown on Employee Retention Tax Credit abuse fraud scams
The IRS warned employers about heavy penalties and interest on future repayment for any business involved in an ERC scam.

Omega Can Review Your Existing ERC Filing for IRS Compliance

Omega Accounting Solutions now offers ERC Review service to businesses that claimed ERC but may be uncertain about the validity of their claim. If you already claimed ERC and feel that your filing may lack sufficient documentation, Omega’s ERC experts can examine your claim for compliance with IRS ERC requirements, identify any potential liabilities, and highlight the red flags so that your business can easily correct them.

Omega’s ERC Filing Review provides a detailed report and comprehensive analysis with actionable recommendations to correct any inaccuracies and protect your business from potential ERC audit penalties.

How to Avoid ERC Scams: 4 Questions to Ask Your Provider

With all this concern about ERC scams, you must properly vet your ERC provider before doing business with them. Before agreeing to anything, ask the tax credit specialist the following questions to ensure their service is honest and accountable.

1. How long have you been in business?

Many ERC providers have started up in the last two years, and these are typically the companies susceptible to ERC abuse. They don’t have the experience to make good judgments on open-ended ERC qualifications, and they likely don’t have the manpower to delve deeply into your business’s operations. The worst providers don’t really care if you truly qualify, because they will close up shop once the ERC expires.

2. Do you provide other tax credits or only the ERC?

The ERC has made tons of money available to businesses via tax refunds. Looking to get their piece of the take, a large number of ERC-only companies have popped up. These “ERC mills” rush to process as many Employee Retention Tax Credits as they can without conducting due diligence on their clients. If a company’s only service is ERC, it is possible they run an ERC scam.

3. What percentage of your clients do not qualify for the ERC?

If a tax credit provider qualifies close to 100% of their clients, they run an abusive practice. Simply put, not all companies qualify for the ERC, and if your company doesn’t qualify, it doesn’t qualify — period. If a provider is willing to bend the ERC eligibility requirements for you, they practice ERC fraud.

4. Do you provide supporting ERC documentation?

All legitimate tax credit companies provide defensible documents you can utilize in an audit. If your ERC specialist does not provide these documents, they may not be checking clients’ ERC qualifications at all. If they can’t “show their work” proving your company qualifies, how can you prove it to the IRS?

ERC specialist provider trusted advisor accountants
You don’t need a one-and-done ERC specialist. You need an experienced advisor who can offer trusted insight on multiple tax credits and substantiate your claims in the future.

Omega Accounting Solutions Provides Trustworthy ERC Service

Omega Accounting Solutions performs thorough due diligence for every client and furnishes supporting documentation to substantiate each ERC claim. Omega does not run an ERC scam; they work with honesty and integrity to ensure your business truly meets the IRS’s official ERC qualifications. If your company qualifies, Omega’s tax credit experts know precisely how to build your ERC claim to easily survive an audit. Founded in 2007, Omega services multiple tax credits, including the Employee Retention Credit and Research and Development (R&D) tax credit.

The Employee Retention Credit is real. So are the unscrupulous “ERC Mills.”  Don’t miss out on money you are entitled to for retaining your employees during the pandemic. Choose an ERC provider that offers multiple services to support you for years to come. Choose a trusted advisor that you can count on—choose Omega.

How to Select an ERC Partner You Can Trust