Identity theft usually takes center stage during most tax-scam discussions. After all, so much of our personal and professional lives take place online in emails, texts, and direct messages—all of which are ripe targets for phishing attacks. However, not all identity threats are limited to inboxes.
The Internal Revenue Service began its 2023 Dirty Dozen campaign by warning taxpayers about a scam that is being spread through radio and online advertisements. Fraudsters are encouraging ineligible businesses to claim the Employee Retention Credit (ERC) by spreading incorrect eligibility requirements.
How does the ERC scam work?
Taxpayers are generally introduced to the scam in ads promoting easy ERC payouts. Once contacted, these third parties tend to either charge a significant upfront fee or collect a percentage from the employer’s refund—two tactics often utilized by scammers (like ghost preparers).
The scammers might use any of the following methods to convince employers to claim the credit:
- [Inaccurately] explain eligibility for and computation of the credit
- [Suggest] that all employers are eligible without evaluating an employer’s individual circumstances
- [Fail to] inform employers that they cannot claim the ERC on wages that were reported as payroll costs in obtaining Paycheck Protection Program loan forgiveness
In addition to causing a headache for legitimate tax professionals dealing with duped business clients, the ERC scam could result in penalties—civil and criminal—and identity theft.
What is the legitimate method for claiming the ERC?
The Employee Retention Credit was created to help qualifying businesses weather pandemic-related shutdowns from March 13, 2020, to December 31, 2021—providing refundable tax credits for continuing to pay employees or experiencing a reduction in gross receipts during that period. So, to claim the ERC, employers need to meet the following criteria:
- 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
For more information about credit eligibility, check out Notice 2021-20, Notice 2021-23, Notice 2021-49, Notice 2021-65, and Revenue Procedure 2021-33.
What should employers do if they were convinced to participate in the ERC scam?
The IRS suggests that employers who participated in the ERC scam should immediately file an amended return. The agency reminds that “taxpayers are always responsible for the information reported on their tax returns,” and “improperly claiming the ERC could result in taxpayers being required to repay the credit along with penalties and interest.”
Sources: IR-2023-49; IR-2022-183