ERC Audit Risk
The risk of audit by the IRS is real. Below please find a list of relevant announcements and notices published by the IRS and others specifically related to the Employee Retention Credit (ERC) program.
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IRS issues renewed warning on Employee Retention Credit claims; false claims generate compliance risk for people and businesses claiming credit improperly
| Get Refund Protection’s Observations: This is the first time that the IRS has ever published multiple warnings related to a tax credit program. We don’t believe the timing of these press releases and the announcement to hire tens of thousands of new IRS agents is a coincidence. |
IR-2023-40, March 7, 2023
WASHINGTON — The Internal Revenue Service today issued a renewed warning urging people to carefully review the Employee Retention Credit (ERC) guidelines before trying to claim the credit as promoters continue pushing ineligible people to file.
The IRS and tax professionals continue to see third parties aggressively promoting these ERC schemes on radio and online. These promoters charge large upfront fees or a fee that is contingent on the amount of the refund. And the promoters may not inform taxpayers that wage deductions claimed on the business’ federal income tax return must be reduced by the amount of the credit.
“While this is a legitimate credit that has provided a financial lifeline to millions of businesses, there continue to be promoters who aggressively mislead people and businesses into thinking they can claim these credits,” said Acting IRS Commissioner Doug O’Donnell. “Anyone who is considering claiming this credit needs to carefully review the guidelines. If the tax professional they’re using raises questions about the accuracy of the Employee Retention Credit claim, people should listen to their advice. The IRS is actively auditing and conducting criminal investigations related to these false claims. People need to think twice before claiming this.”
The IRS has been warning about this scheme since last fall, but there continue to be attempts to claim the ERC during the 2023 tax filing season. Tax professionals note they continue to be pressured by people wanting to claim credits improperly. The IRS Office of Professional Responsibility is working on additional guidance for the tax professional community that will be available in the near future.
People and businesses can avoid this scheme, and by not filing improper claims in the first place. If the business filed an income tax return deducting qualified wages before it filed an employment tax return claiming the credit, the business should file an amended income tax return to correct any overstated wage deduction.
Businesses should be cautious of advertised schemes and direct solicitations promising tax savings that are too good to be true. Taxpayers are always responsible for the information reported on their tax returns. Improperly claiming the ERC could result in taxpayers being required to repay the credit along with penalties and interest.
AICPA Encouraged by IRS Warning of ERC Mills and Authorization of Anonymous Reporting Process for Firms, Individuals
Washington, D.C. (October 24, 2022) – Following an announcement from the Internal Revenue Service (IRS) acknowledging concerns over third-party vendors promoting improper Employee Retention Credit (ERC) claims, the American Institute of CPAs applauded the announcement and new reporting process as a positive step by the IRS. The form – Form 3949-A, Information Referral – will provide a vehicle for individuals, firms and CPAs to anonymously report questionable ERC mills. The form has been previously available for use to anonymously report fraud and has now been earmarked to report ERC fraud as well.
The ERC was established nearly three years ago as part of a larger COVID-19 relief package in an effort to help businesses pull through the pandemic. More recently, the AICPA has heard from members concerned with the rise of non-CPA ERC vendors taking inappropriately aggressive positions. These vendors submit claims on behalf of businesses that are either unknowingly unqualified or qualified for a much smaller credit, charging upfront contingency fees of up to 25 percent of the claimed credit. These claims, if audited by IRS, could result in drastic reductions to the improperly obtained credits, costing the business significantly.
“For more than a year, the AICPA has communicated its concerns to the IRS and the Department of the Treasury regarding the unscrupulous business practices of ERC mills, and we are encouraged by this acknowledgement by the IRS of these questionable business practices around the ERC,” said AICPA President and CEO, Barry Melancon, CPA, CGMA. “This credit has been hugely beneficial to countless businesses that struggled to navigate the challenges brought on by the pandemic, and CPAs have often advised clients and business owners against taking the improper recommendations of these third-party vendors. We are pleased that employers and others now have a mechanism to anonymously report bad actors and help to protect the public against them.”
Employers warned to beware of third parties promoting improper Employee Retention Credit claims
IR-2022-183, October 19, 2022
WASHINGTON — The Internal Revenue Service today warned employers to be wary of third parties who are advising them to claim the Employee Retention Credit (ERC) when they may not qualify. Some third parties are taking improper positions related to taxpayer eligibility for and computation of the credit.
These third parties often charge large upfront fees or a fee that is contingent on the amount of the refund and may not inform taxpayers that wage deductions claimed on the business’ federal income tax return must be reduced by the amount of the credit.
If the business filed an income tax return deducting qualified wages before it filed an employment tax return claiming the credit, the business should file an amended income tax return to correct any overstated wage deduction.
Businesses are encouraged to be cautious of advertised schemes and direct solicitations promising tax savings that are too good to be true. Taxpayers are always responsible for the information reported on their tax returns. Improperly claiming the ERC could result in taxpayers being required to repay the credit along with penalties and interest.
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