At a Glance
Main Takeaway
There has been a recent rise in scams involving fraudulent Employee Retention Credit (ERC) filing services, which target vulnerable businesses seeking support from the program. The issue has become so worrying that the IRS issued a warning to small businesses in April 2023 to beware of ERC scams.
Next Step
Understanding what an ERC scam looks like and how to avoid falling victim to phony ERC services and “specialists” can help protect your business. Working with reliable, professional ERC experts can ensure you take advantage of the credit if your business qualifies.
What is the ERC?
The ERC is a government-sponsored program designed to provide financial assistance to businesses that retain employees during challenging economic periods, such as the COVID-19 pandemic. The more robust ERC was introduced as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in the United States in March 2020; however, the credit itself has been around for much longer.
The primary objective of the ERC is to help companies retain their workforce by offering a payroll tax credit. This credit is calculated based on eligible wages paid to qualified employees, subject to specific criteria and limitations. The ERC provides financial relief and incentivizes businesses to retain employees, minimizing layoffs and promoting economic stability.
To qualify for the ERC, businesses must meet specific eligibility requirements, including experiencing a significant decline in gross receipts or being subject to a full or partial suspension of operations due to government-mandated restrictions.
Recent ERC Scams Affecting U.S. Businesses
The ERC has specific approval guidelines to help businesses impacted by the COVID-19 pandemic. These eligibility guidelines can be challenging to understand, leaving small business owners and CFOs vulnerable to the risk of scammers who promise to help.
In the spring of 2023, the IRS issued a warning to businesses regarding ERC scams. Placing these fraudulent dealings on their 2023 Dirty Dozen list, the IRS sounded the alarm on ERC scams, telling companies that scammers have been placing ads on the radio and online and targeting victims through email to get them to buy into the scam.
The consequences of falling victim to ERC scams can be severe. Businesses may face financial losses through unauthorized transactions, fees paid to fraudulent consultants, or IRS penalties for non-compliance with ERC regulations. Sensitive employee and business data obtained by scammers can be misused for identity theft, furthering the negative impact on businesses and individuals.
Beyond financial implications, businesses may also suffer reputational damage if their customers or partners become aware of their involvement in fraudulent activities. Trust and credibility, built over years of operation, can be eroded, leading to a loss of business opportunities and long-term viability.
How ERC Fraud Works
There are several ways a scammer will try to gather sensitive data or collect a fee from a business in an ERC scam. Scammers may do the following to trick you into paying for their fake services or obtain protected information:
- Impersonation: Scammers often pose as government officials, tax agencies, or ERC specialists. They may contact businesses via email, phone, or even in-person visits, using official-sounding titles and credentials to gain credibility. Scammers aim to establish a sense of legitimacy and trust by impersonating trusted entities.
- Phishing: Phishing is a common method used in ERC fraud. Scammers send deceptive emails that appear to be from legitimate sources, such as government agencies or ERC consultants. These emails often contain official-looking logos, language, and instructions, luring businesses to click on malicious links or provide sensitive information, including Social Security numbers, employee data, or bank account details.
- False Promises: Scammers may promise businesses expedited processing, higher credit amounts, or guaranteed approvals for their ERC claims. They exploit the urgency and financial distress experienced by businesses, making enticing offers that seem too good to be true. These false promises manipulate companies into sharing sensitive information or paying upfront fees.
- Fake Documentation: In some cases, scammers provide or sell forged documentation to support fraudulent ERC claims. This includes fabricated payroll records, falsified financial statements, or altered tax documents. By presenting these false documents, scammers deceive businesses into believing they are eligible for greater ERC benefits, leading to potentially illegal or fraudulent claims. Some scams involve submitting fraudulent information to the IRS for an ERC claim. In this case, it is essential to remember that while the scammer convinces the person to file the claim, it is the business that commits the act of fraud, and penalties may apply.
- Fee Scams: Scammers may pose as ERC consultants and offer their services to businesses. They request upfront fees or a percentage of the potential ERC benefits, claiming they possess specialized knowledge or connections to expedite the process or increase the credit amount. Once the payment is made, these scammers disappear, leaving businesses without assistance and no way to recoup their money.
Do You Qualify for the ERC?
To qualify for an ERC, businesses must meet specific eligibility requirements outlined by the IRS. The most recent IRS guidelines include the following criteria:
- Continued Pay: The business must have continued to pay its employees while operations ceased.
- Suspension of Operations: COVID-19 or orders from appropriate governmental authorities caused business operations to cease, limiting commerce, travel, or group meetings.
- Decline in Gross Receipts: In 2020 and the first three quarters of 2021, your business saw a significant decline in gross receipts compared to 2019.
- Recovery Startup Business: You may be eligible if your business qualified as a recovery startup business during the third or fourth quarter of 2021.
You can work with a trusted ERC specialist from Windes to accurately determine if you qualify for the ERC credit. Our experienced professionals understand the complex IRS qualifications and will ensure compliance when filing for the ERC tax incentive.
How to Avoid ERC Scams
The following tips can help minimize the risk of falling for an ERC scam and find a reliable ERC specialist to determine your eligibility and help you file a legitimate ERC credit application:
- Educate Employees: Ensure that your employees know common scams and how to identify fraudulent communications. Encourage them to be cautious and skeptical of unsolicited emails, phone calls, or in-person visits related to the ERC. Remind them never to share sensitive information unless they can verify the request’s legitimacy.
- Verify the Source: Before trusting an ERC specialist, verify that the company or individual is trustworthy. Only engage a business with accredited services. Look for official credentials, certifications, or affiliations with recognized industry bodies, such as the American Institute of Certified Public Accountants (AICPA) and the California Society of Certified Public Accountants (CalCPA).
- Use Secure Channels: If you plan on sharing sensitive information, only do so through secure channels. Avoid sending confidential data through unencrypted emails or sharing it on unsecured websites. Use encrypted communication tools or secure file-sharing platforms to protect sensitive information.
- Be Cautious of Payment Requests: Exercise caution if someone requests upfront fees or payment in exchange for ERC assistance. Reputable professionals typically charge for their services after delivering results, and their fees are often based on a percentage of the benefits obtained. Be skeptical of individuals or organizations demanding immediate payment without providing substantial evidence or guarantees of their expertise.
- Carefully Check the Agreement: Scam artists will often write in the agreement that they will not be liable if there is an issue. Reputable companies will help you throughout the process, even after the claim has been filed.
Maximize Your Business Tax Credits and Incentives With Windes
Maximizing your business tax credits and incentives is crucial to optimizing your company’s financial position and ensuring long-term success. Windes is a reputable firm that has been in business since 1926. We provide valuable expertise and guidance in navigating complex regulations regarding business tax credits and incentives.
Windes has advisors and ERC specialists you can count on. Partnering with our team lets you allocate more resources towards growth, innovation, and achieving your strategic objectives.
Contact us today to learn how we can help you maximize tax credits and incentives for your business to help you minimize tax liability and keep more of your profits.