IRS audits of businesses claiming the Employee Retention Credit (ERC) are in full swing. The IRS is looking at companies that may be unfairly claiming it, and at the companies that helped them.
Congress provided vast pandemic tax relief in various forms. One of the most popular and enduring ones that is still drawing fire is the ERC.
The ERC is a refundable tax credit designed for businesses who continued paying employees while shut down due to the pandemic or who had significant declines in gross receipts from March 13, 2020, to Dec. 31, 2021. To be eligible, employers must have:
- sustained a full or partial suspension of operations due to orders from an appropriate governmental authority limiting commerce, travel or group meetings due to COVID-19 during 2020 or the first three quarters of 2021,
- experienced a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021, or
- qualified as a recovery startup business for the third or fourth quarters of 2021.
But exactly who qualifies isn’t always clear, and some people qualify in ways that are not obvious. The rules can be nuanced and complex. The IRS is well aware of radio, TV and internet ads with alluring claims of free money, $26,000 per employee, with no money down. The IRS says some tax professionals are being pressured to claim credits improperly.
Taxpayers are responsible for what is reported on their tax returns, and improperly claiming the credit can result in being required to repay the credit, penalties and interest. The IRS has repeatedly warned people to beware of aggressive marketing, and the IRS says that some promoters may lie about eligibility requirements. Tax lawyers and accountants are already seeing numerous audits by the IRS, and more are coming.
The IRS has even announced that its Criminal Investigation Division is working to identify fraud and promoters of fraudulent claims. Illegitimate claims slow down processing of creditd for everyone, says the IRS. The IRS also reminds businesses, tax-exempt groups, and others about simple steps to take to protect themselves from making an improper ERC.
- Work with a trusted tax professional; don’t rely on the advice of those soliciting these credits.
- Don’t apply unless you believe you are legitimately qualified for this credit. Details about the credit are available at IRS.gov under the Employee Retention Credit.
Finally, the IRS is even calling on people to report ERC fraud where they see it. Employers can report illegal tax-related ERC claims and activities by submitting a completed IRS Form 14242.
If you are audited by the IRS, it is almost always a bad idea to try to handle it yourself. You generally don’t want to interact directly with the IRS, which can end up being more expensive in the long run, and it can even be dangerous. Instead, you should hire professionals to handle it for you. That goes double for an audit of the Employee Retention Credit.
