ERC Complexity & Victimization

ERC Strategies for PEOs: Are PEOs to blame for encouraging aggressive or unsupportable ERC positions? 

The IRS has issued a considerable amount of data about ERC issues as they evolve, often as information releases, news releases, tax tips, and the like. The content varies, but two recurrent themes predominate. First, the ERC rules are complex and fluid. Second, many taxpayers have been victimized by companies encouraging aggressive or unsupportable positions. 

Could it be argued that PEOs encouraged their client companies to claim aggressive or unsupportable ERC claims? How can this be refuted if the PEO chose to maintain only some, but not all the records required to substantiate ERC program eligibility?  

Below is just a sample of this messaging from the IRS.

The IRS warned in October 2022 that some parties “are taking improper positions related to taxpayer eligibility for, and computation of, the credit.”

The IRS indicated in March 2023 that parties continued to aggressively advertise improper ERC “schemes” using various outlets and they often neglected to inform taxpayers that they must reduce the wages-paid deduction on their federal income tax returns.

When placing improper ERC claims atop its Dirty Dozen list later that month, the IRS cautioned taxpayers to “be aware of aggressive pitches from scammers,” which constituted “blatant attempts by promoters to con ineligible people to claim the credit,” and which were frequently grounded in “inaccurate information related to eligibility for, and computation of, the credit.” The IRS also indicated that “there are promoters misleading people and businesses into thinking they can claim these credits,” that the Dirty Dozen list is “aimed at helping raise awareness to protect honest taxpayers from aggressive promoters and con artists,” and that “the increased prevalence of websites touting how easy it is to qualify for the ERC lend an air of legitimacy to abusive claims for refund.” The IRS further stated that some companies marketing ERC claims inaccurately explained eligibility requirements, failed to tell employers that only recovery startup businesses could seek ERCs for the fourth quarter of 2021, and buried the fact that employers cannot solicit ERCs on the wages previously used as payroll costs in obtaining Paycheck Protection Program loans.

In May 2023, the IRS announced that it continued to see “a barrage of aggressive broadcast advertising, direct mail solicitations and online promotions involving the Employee Retention Credit [by] aggressive promoters [that] are wildly misrepresenting and exaggerating who can qualify for the credits.” It also underscored that the aggressive marketing was “preying on innocent businesses and others.” The IRS then identified “a variety of ways that promoters can lure businesses, tax-exempt groups, and others into applying for the credit.” It emphasized complexity, too, observing that the ERC “is a complex credit that requires careful reviewing before applying” and that the eligibility requirements “are technical areas that require review.”

Later, in July 2023, when discussing the “flood of schemes” involving ERCs, the IRS reiterated that “scam promoters are luring people to improperly claim the ERC,” often by making “false claims about their company’s legitimacy.” That same month, the IRS announced that it continued “to warn businesses not to fall for aggressive marketing or scams related to the ERC” and offered a webinar in this regard. It reaffirmed its ongoing mantra that “unscrupulous promoters make false claims about their company’s legitimacy and often don’t discuss some key eligibility factors, limitations, and income tax implications that affect an employer’s tax return.”

A tax tip issued soon thereafter contained some of the IRS classics, including that it continues discovering different ways that “promoters can lure businesses, non-profit groups, and others into applying for the credit.”

The IRS then issued another document emphasizing that the ERC has “very specific eligibility requirements” and “technical areas that require review.”

In announcing the ERC processing moratorium in September 2023, the IRS indicated that it was “increasingly alarmed about honest small business owners being scammed by unscrupulous actors,” described the moratorium as a “safety net to focus on fraudulent claims and scammers taking advantage of honest taxpayers,” and hinted at new initiatives in the future “to help businesses who found themselves victims of aggressive promoters.” The IRS also acknowledged how challenging ERC claims can be, urging taxpayers to hire a trusted tax professional “who actually understands the complex ERC rules,” and characterizing the ERC as “an incredibly complex credit” with “specific” and “precise” eligibility standards.

The IRS introduced its withdrawal option in October 2023. Its objective was “to help small business owners and others who were pressured or misled by ERC marketers or promoters into filing ineligible claims.” The IRS recognized that aggressive marketing of questionable ERC claims “has harmed well-meaning businesses and organizations,” that some promoters “have misled employers and harmed honest employers by misrepresenting and exaggerating” pivotal standards, and that the ERC is a “complex credit with precise requirements.”

The IRS left little room for misunderstanding when it issued Publication 5887 in November 2023. It was titled “Employee Retention Credit Eligibility Checklist: Help Understanding This Complex Credit.” That document contained a chart summarizing the eligibility criteria, admonishing taxpayers that “this is a very technical area of law.”

In December 2023, the IRS announced that it was issuing approximately 20,000 notices of disallowance to two categories of ERC claims that clearly failed to meet the eligibility requirements. In doing so, the IRS commissioner indicated that it was “not surprising” to see claims of this nature given the “aggressive marketing” in the ERC arena.

Later that month, the IRS introduced its Voluntary Disclosure Program (VDP), which it described as “part of a larger effort at the IRS to stop aggressive marketing around ERC that misled some employers into filing claims.” The driving force for the VDP was concern over the number of fraudulent ERC claims resulting from the “false and misleading public advertisements and scams taking advantage of taxpayers.”

The IRS is not alone; several organizations have issued reports featuring similar conclusions. Take, for example, the report by the National Taxpayer Advocate to Congress in 2021. It indicated that the ERC is a “complex” refundable tax credit whose tricky issues include determining when a business is partially or fully suspended because of an appropriate governmental order, the number of full-time employees, which wages qualify, how the business-aggregation rules affect the analysis, and whether business operations before and after a governmental order are “comparable.” The report also indicated that the ERC “is a significant tax benefit for employers, but its complexity presents opportunities for error” and that it “may appear straightforward, but there are many layers of complexity.”

Another report by the National Taxpayer Advocate to Congress, this time in 2023, made several pertinent observations. First, it explained that “taxpayers have struggled to determine eligibility, and the IRS has likewise struggled to process these claims, because of both the volume and the complexity of the law.” Second, the complexity of the ERC, combined with the lucrative nature of the credit, led to many companies providing “bad or misleading advice” to small businesses and encouraging them to make ERC claims “regardless of eligibility.” Third, in mid-2023, the IRS essentially stopped processing claims “to handle the complexity and the increase in aggressive and misleading marketing that may have lured honest small businesses and organizations into erroneously claiming the credit.” Fourth, the IRS imposed a processing moratorium in September 2023 because “it was concerned that business owners were being victimized.” Fifth, the “continuing saga of ERC claims” should provide a lesson to the IRS about how to develop early public guidance, as well as internal processes to implement new legislation. While the IRS supplied some direction soon after Congress created the ERC in the CARES Act, “the guidance and rules for eligibility confused many small business owners [and] taxpayers and tax professionals were largely unable to reach knowledgeable IRS representatives who could clarify how the rules would apply in their situation.” Sixth, the mix of “confusing rules,” the absence of a duty for taxpayers to attach supporting documentation to their Forms 941-X claiming ERCs, and inefficient IRS processes “created fertile ground for ERC mills to lure business owners into filing fraudulent claims.”