Let the Small Business (ERC) Filer Beware

By SBE Council at 27 February, 2023, 4:30 pm

SMALL BUSINESS INSIDER

RENEWED IRS WARNING ISSUED ON MARCH 7: “False Claims Generate Compliance Risk for People and Businesses Claiming Credit Improperly. See the March 7, 2023 warning here.

By Karen Kerrigan –

For the past six months or more, my inbox has been flooded with offers to “quickly assess” how SBE Council qualifies for “the powerful” Employee Retention Credit (ERC or ERTC). The radio airwaves and social media platforms are also filled with ads claiming that certain companies will help my group – and your small business – get its “fair share” of dollars from the tax credit, which could be worth up to $7,000 per employee, per calendar quarter, to eligible employers.

According to the Internal Revenue Service (IRS):

The Employee Retention Credit (ERC) is a refundable tax credit for businesses that continued to pay employees while shut down due to the COVID-19 pandemic or had significant declines in gross receipts from March 13, 2020 to Dec. 31, 2021. Eligible employers can claim the ERC on an original or adjusted employment tax return for a period within those dates.

For quite some time we’ve known that SBE Council is not ERC-eligible because we did not suspend our operations and, thankfully, we did not experience a decline in revenues – and more specifically a decline in gross receipts (20% or greater) during the timeframe that the credit uses to determine eligibility.  Despite the fact that the IRS has warned taxpayers about this aggressive ERC outreach to small businesses, and some misleading assertions being made in some ads (qualification rules are complex and some firms have incorrectly advised small businesses about key details), our small business members and small business owners in general continue to inquire about the ERC and whether they should claim it.

“ERC mill” is the new term describing firms pushing small businesses to conduct an assessment, but there are also legitimate firms working in this space to help small businesses determine their eligibility. Still, some questionable firms have emerged overnight. The costs for these services may be significant, and some firms are not being transparent or forthright about ERC rules and nuances.

In addition, according to the March 7 IRS warning, “These promoters [pushing ineligible people to file] charge large upfront fees or a fee that is contingent on the amount of the refund. And the promoters may not inform taxpayers that wage deductions claimed on the business’ federal income tax return must be reduced by the amount of the credit.”

As tax expert and Big Ideas for Small Business® founder Barbara Weltman noted in observations when asked about the ERC and related issues surrounding the aggressive advertisement activity:

“The rules are straightforward: The employee retention credit – a tax credit against employment taxes – applied to wages paid through September 30, 2021 (December 31, 2021, for startup businesses). However, an amended Form 941 may be filed if the credit applied but wasn’t claimed on an original form. The deadlines are: April 15, 2024, to file amended returns for Q2, Q3, and Q4 of 2020 – and April 15, 2025, to file for all applicable 2021 quarters.”

With respect to the firms, influencers, and social media ads pushing the ERC, Barbara observed:

“The radio and TV ads imply that just about every business is eligible for the credit, but this isn’t so. The credit can only be claimed by businesses that continued to pay employees while shut down due to the COVID-19 pandemic or had significant declines in gross receipts from March 13, 2020, to September 30, 2021 (or December 31, 2021, for startup businesses). The IRS has rules on figuring eligibility and the conditions aren’t easy to meet.” See the list of ERC notices here.

Barbara also pointed out that the IRS warned taxpayers about ERC scams last year, and the agency’s Criminal Investigation division has started charging tax crimes related to the ERC:

“The first case against a so-called ERC mill was filed on February 1st, indicting Zachary Bassett and Mason Warr of Utah, along with their company, COS Accounting & Tax LLC, for tax conspiracy under 18 U.S.C. Section 371, false tax return charges under Section 7206(2), and wire fraud under 18 U.S.C. Section 1343 for allegedly running an ERC claim mill.”

Barbara’s bottom line is this: “Don’t buy the hype from an ERC mill, and only trust your regular CPA or other knowledgeable tax professional to help with claiming the credit.”

Certainly, if a business is legitimately eligible for the credit but failed to claim it when it filed its quarterly employer tax return, an amended return should be file now, before it’s too late.

She also said that with a ramped-up IRS staff, expect to see more cases against those running ERC mills and their clients who possibly claimed bogus credits. So, audits will likely increase in this space generally.

If it sounds too good to be true….

Longtime SBE Council friend, member and tax expert Leonard Steinberg, principal of Steinberg Enterprises, LLC agrees with Barbara’s guidance and views. He notes:

“The process is for firms “who qualify” to file amended payroll reports to generate the possible credit. The program is for real and small business owners should not hesitate to file to determine if they qualify.  These business owners should check with their respective accountants and tax advisors for further advice.”

But Steinberg warns self-preparers: “The firms that are advertising often take a high percentage of the refund as compensation.  There are many scams out there quite similar to the tax resolution scams of years past. If a small business employer wishes to use such a service, they must do their due diligence and check with their local chambers of commerce or BBBs to ensure that the companies are reputable.”

A blog posted by the National Society of Accountants for Cooperates affirms Barbara’s warning about the IRS’s focus on fraudulent ERC claims:

ERC mills appear to have caught the attention of the IRS. Dan Chodan, a partner at Trout CPA in Lancaster, Pennsylvania, wrote last week on Twitter that he had spoken with “a senior employment tax IRS auditor leading a team awaiting their training and ERC cases.” The tax agency, he wrote, conducted a pilot program in recent months and was training agents to take a microscope to taxpayers claiming the credit. “IRS is pulling 90% of exam staff to focus on audits of the Employee Retention Credit,” he added.

So, filers beware. Small business owners who amend their business returns to claim the ERC will be closely monitored. Each small business owner has to decide whether the higher probability of being audited – even if the business qualified for the credit – is worth its value in light of increased scrutiny by the IRS.

Related resource:

Beware of ERC Free Money Claims | Kohrman Jackson & Krantz LLP – JDSupra 

Karen Kerrigan is president & CEO of the Small Business & Entrepreneurship Council.