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A little-known tax credit. A lot of potential fraud.

The CARES Act created a tax credit to keep employees on payroll during the pandemic. The Internal Revenue Service (IRS) recently warned employers to look out for scammers using the credit to promise tax savings that are too good to be true.

PPP. EIDL. PUA. There’s no shortage of acronyms born from pandemic relief laws. Here’s another worth adding to the list: ERC.

The Employee Retention Credit (ERC) is a tax credit that employers can use to offset employment taxes Examples of employment taxes are Social Security and Medicare taxes. . The credit is a certain percentage of qualified wages paid, allowing employers to receive up to $5,000 per employee in 2020 and up to $28,000 per employee in 2021. To qualify, employers must have owned a business during the period they are claiming the credit, had a decline in gross receipts, or either fully or partially suspended operations due to the pandemic.

Employers have claimed 367,280 ERCs totaling about $32 billion, according to a report from the Government Accountability Office (GAO). However, the GAO only had access to partial data, so it’s likely the number of returns with ERCs is higher.

The American Rescue Plan Act extended eligibility for the tax credit to “recovery startup businesses” (RSB). Generally, a business qualifies as an RSB if it began operations after February 15, 2020.

But there’s no way for the IRS to verify if a business is an RSB. Instead, it’s relying on a taxpayer’s self-attestation – a practice we’ve reported led to significant fraud in other pandemic relief programs. The Treasury Inspector General for Tax Administration (TIGTA) found 928 businesses claiming nearly $17.5 million in ERCs that had an Employer Identification Number issued before February 15, 2020 – a potential sign of ineligibility.

And there’s more. TIGTA found that the IRS didn’t have time after the CARES Act was passed to make necessary programming changes because the tax filing season was already underway. So, tax returns were not initially screened to identify potentially fraudulent ERCs. The IRS subsequently identified 11,096 suspicious returns indicating potential identity theft for more than $2 trillion in credits claimed. However, the IRS has since implemented new procedures to identify potentially fraudulent claims.

In Utah, a tax preparer pled guilty for filing fake tax returns claiming more than $11 million in ERCs. He convinced independent contractors to convert their businesses into limited liability companies to qualify for the ERC. He then charged each client additional fees for preparing returns that claimed the credit.

The IRS is warning taxpayers about ERC scams. Read their latest alert for more.


Page last modified: 11/06/2023
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