As the Internal Revenue Service (IRS) recently eliminated its backlog of Employee Retention Credit claims, it announced new procedures to deal with Employee Retention Credit scams and fraudulent submissions. Moving forward, the IRS will ramp up compliance work to ensure employers understand how to properly claim the credit and avoid scammers. The IRS also provided warning signs of scams and tips for businesses to protect themselves. Indeed, the agency regularly provides tools and other information to help businesses understand and meet their tax obligations. In May, the IRS shared tax benefits and small business resources with new and established small business owners.

Combatting Employee Retention Credit Scams

IRS Commissioner Danny Werfel stated that the percentage of legitimate claims is diminishing “the further we get from the pandemic” and that “more questionable claims [are] coming in following the onslaught of misleading marketing.” Because of this, Werfel stated that the IRS increased audits and criminal investigations targeting both Employee Retention Credit scammers and employers that file fraudulent claims. The IRS provided several warning signs for employers to help sniff out Employee Retention Credit scams. These include the following:

  • Unsolicited calls or advertisements mentioning an “easy application process”
  • Large upfront fees or fees based on a percentage of the refund amount
  • False statements that a company can determine eligibility within minutes
  • Claims and broad statements that an employer can qualify before any individual discussion or assessment even occurs
  • Aggressive marketing and direct mailers that are made to look official

Scammers may lie about eligibility requirements and refuse to provide documents supporting their claims about the credit. Additionally, employers may be at risk of a scammer stealing taxpayer information. Knowing that, employers should also follow some key tips for protecting against cybersecurity threats.

Protecting Against Scams

The IRS reminded employers of the following steps to protect themselves from Employee Retention Credit scams or fraudulent claims:

  • Work with a trusted tax professional rather than those soliciting the credits.
  • Request a worksheet explaining eligibility for the credit and related computations.
  • Do not apply unless the business qualifies for the credit.

Addressing one scammer tactic regarding supply chain disruptions, the IRS reminded employers that employers qualify only if they had to suspend operations because of supply chain disruptions directly related to a government order that caused the supplier to suspend its own operations. General supply chain disruptions unrelated to government orders do not qualify.

How to Properly Claim the Employee Retention Credit

When eligible employers file a proper Employee Retention Credit claim, they can receive a refundable tax credit for having continued to pay employees white shut down during COVID-19. They may also receive the credit if they had a significant decline in gross receipts during the eligibility periods. Only recovery startup businesses may receive the credit refund for the fourth quarter of 2021. Meanwhile, for any quarter, employers may not claim the credit for wages reported as payroll costs in obtaining Paycheck Protection Program (PPP) loan forgiveness or other tax credits. Otherwise, eligible employers must have:

  • sustained a full or partial suspension of operations because of government orders limiting commerce, travel, or group meetings during the COVID-19 pandemic in 2020 or the first three quarters of 2021;
  • had a significant decline in gross receipts in 2020 or the first three quarters of 2021; or
  • qualified as a recovery startup during the third or fourth quarters of 2021.

Eligible employers may claim an Employee Retention Credit on an original or amended employment tax return for qualified wages paid between March 13th, 2020, and December 31st, 2021.