Beware Third Parties Promoting Improper ERC Claims

Taxpayers are always responsible for the information reported on their tax returns. Businesses are encouraged to be cautious of advertised schemes and direct solicitations promising tax savings that are too good to be true.

As such, employers should be wary of third parties taking improper positions related to taxpayer eligibility for and computation of the credit – advising them to claim the Employee Retention Credit (ERC) when they may not qualify. These third parties often charge large upfront fees or a fee contingent on the refund amount. Further, they may not inform taxpayers that wage deductions claimed on the business’s federal income tax return must be reduced by the amount of the credit.

Improperly claiming the ERC could result in taxpayers being required to repay the credit along with penalties and interest. Suppose the business filed an income tax return deducting qualified wages before it filed an employment tax return claiming the credit. In that case, the business should file an amended income tax return to correct any overstated wage deduction.

What is the Employee Retention Credit (ERC)?

The ERC is a refundable tax credit designed for businesses that continued paying employees while shut down due to the COVID-19 pandemic or had significant declines in gross receipts from March 13, 2020, to December 31, 2021. Eligible taxpayers can claim the ERC on an original or amended employment tax return for a period within those dates.

To be eligible for the ERC, 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 Guidance on the Employee Retention Credit under the CARES Act for the First and Second Calendar Quarters of 2021 Notice 2021-2 of 2021.

As a reminder, only recovery startup businesses are eligible for the ERC in the fourth quarter of 2021. Additionally, for any quarter, eligible employers cannot claim the ERC on wages reported as payroll costs in obtaining PPP loan forgiveness or used to claim certain other tax credits.

To report tax-related illegal activities relating to ERC claims, submit Form 3949-A (PDF), Information Referral. You should also report instances of fraud and IRS-related phishing attempts to the Treasury Inspector General for Tax Administration at 800-366-4484.