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Beware Come-Ons to Claim Employee Retention Tax Credits

IRS warns of hucksters pushing the complex, often illicit tax scheme on internet and radio

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If you’re an employer, you’d probably love to get the Employee Retention Credit (ERC), a federal tax credit of up to $7,000 per quarter per employee. And, yes, it’s a real thing.

But you can also get scammed, and the IRS is cautioning taxpayers to tread carefully when claiming it — and to make sure that they’re dealing with a legitimate tax adviser. Be particularly wary of tax preparers who are advertising heavily on radio and internet, touting big tax savings via the ERC.

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About the Employee Retention Credit

The ERC is a generous tax benefit for businesses that retained their employees early on during the COVID-19 pandemic. The credit is available to businesses that were forced to fully or partially shut down between March 13, 2020, and Dec. 31, 2021. In addition, the credit is available to any employer with significantly lower gross receipts compared with 2019. The credit is not available to individuals, only businesses.

What makes the tax benefit particularly generous is that it’s a credit. Unlike a tax deduction, which reduces taxable income, a tax credit cuts your tax bill dollar for dollar. Even better, the ERC is a refundable tax credit, which means that if your credit is larger than the amount of tax you owe, the government will write you a check for the remainder of the credit. In short, it can turn a tax bill into a tax refund, or a tax refund into a bigger refund.

The ERC for the 2020 tax year is 50 percent of up to $10,000 of an employee’s wages that year. It covers wages paid after March 13 and before Dec. 31, 2020. For 2021, the ERC is 70 percent of up to $10,000 of an employee’s wages for each quarter. (Most businesses can’t claim the credit for the last three months of 2021.) The ERC was not renewed for tax year 2022, but employers may still make claims for the credits for 2020 and 2021 by filing amended tax returns.

Don’t be too quick to file an amended return. Earlier in December, the IRS sent more than 20,000 copies of Letter 105 C, Claim Disallowed, to taxpayers notifying them of disallowed ERC claims. This group of letters will cover taxpayers ineligible for the ERC either because their entity did not exist or did not have employees for the time period when the credit was claimed.

“With the aggressive marketing we saw with this credit, it’s not surprising that we’re seeing claims that clearly fall outside of the legal requirements,” said IRS Commissioner Danny Werfel. “The action we are taking today is part of an initial set of steps in our compliance work in this area, and more letters will be going out in the near future, including both disallowance letters and letters seeking the return of funds erroneously claimed and received.”

Enter the scammers

The ERC is both extremely complicated and potentially very lucrative, which is why unscrupulous tax advisers and preparers have taken advantage of it ­— and why it has landed on the IRS’s annual “Dirty Dozen” tax scams list. Scammers are promoting ERC opportunities and charging large fees upfront that are contingent on the amount of a purported refund. Often, tax officials find the schemers do not inform taxpayers that wage deductions claimed on federal income tax returns must be reduced by the amount of the tax credit.

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According to Pandemic Oversight, a federal government website, a Utah tax preparer filed fake tax returns claiming more than $11 million in ERCs for his clients. Then he tacked on additional fees for preparing the fake returns.

And it can get worse than getting dinged by the IRS. Nothing makes a scammer happier than having your taxpayer identification number. “Additionally, some of these advertisements exist solely to collect the taxpayer’s personally identifiable information in exchange for false promises,” the IRS says. “The scammers then use the information to conduct identity theft.

How to prevent tax fraud

A tax preparer may face fines or jail time for making mistakes or outright swindling the government, but ultimately, it’s your name on the tax return. You have to cough up the money for unpaid taxes, fines and penalties. A few telltale signs of tax scammers:

  • They refuse to sign your return, or don’t have an IRS preparer tax identification number.
  • They base their charges on a percentage of your refund.
  • They ask you to sign a blank or incomplete tax form.
  • They file the return without allowing you to review it. 

And, to be on the safe side, check the IRS searchable database for qualified tax preparers.

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