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Employee Retention Credit (ERC)

False Employee Retention Credit Claims Can Mean Big Problems Later

While you were relaxing after a long day, a commercial pops up on TV. It promises a hefty tax refund through something called the Employee Retention Credit (ERC). Sounds too good to be true, right? Unfortunately, it often is.

The IRS is strongly advising businesses to be cautious about the ERC. Aggressive promoters are targeting unsuspecting companies, pushing them to claim the credit even if they don’t qualify. This can lead to a financial nightmare down the road.

What is the Employee Retention Credit?

The ERC is a tax credit designed to help businesses that kept employees on payroll during the COVID-19 pandemic. It applies to wages paid between March 13, 2020, and December 31, 2021. Here’s a quick breakdown:

  • 2020 Credit: 50% of qualified wages, up to $10,000 per employee, with a maximum credit of $5,000 per employee.
  • 2021 Credit: 70% of qualified wages, up to $10,000 per employee per quarter. This translates to a maximum of $7,000 per employee for each quarter (excluding special rules for “recovery startup businesses” in Q4 2021).

Who Qualifies for the ERC?

Not every business can claim the ERC. You must meet one of the following criteria:

  • Business Operations Curtailed: Your operations were partially or fully suspended due to government orders limiting business activity (travel, gatherings) due to COVID-19 (applicable to 2020 and first three quarters of 2021).
  • Significant Decline in Gross Receipts:
    • 2020: Your gross receipts were less than 50% of the same quarter in 2019. This ends when your gross receipts for a quarter exceed 80% of the comparable quarter in 2019.
    • 2021: Your gross receipts were 80% or less than the same quarter in 2019 (20% decline). You can also use the previous quarter’s receipts compared to 2019. Special rules apply to startups established in 2020.
  • Recovery Startup Business (Q3 & Q4 2021 only): You meet specific criteria for qualified startup businesses.

The Hidden Costs of Aggressive Promoters

Be wary of promoters who advertise quick and easy ERC claims. They often:

  • Charge large upfront fees or a percentage of the refund.
  • Don’t tell you the whole story. Here’s what they might neglect to mention:
    • Claiming the credit reduces your wage deductions on tax returns, potentially increasing your tax liability.
    • ERC can’t be claimed for forgiven PPP (Paycheck Protection Program) loan wages.
    • Amending tax returns can be complex, requiring adjustments to both business and personal income tax filings.

The Tax Trap: What Happens if You Don’t Qualify?

Many businesses are amending past payroll returns to claim the ERC. While some claims are legitimate, others might be based on misinformation or even fraud. Here’s how things can go wrong if you don’t qualify:

  1. Promoter amends your payroll tax forms for a refund.
  2. IRS issues the refund.
  3. Promoter takes a cut.
  4. Your business tax returns need amending to reflect the reduced wages (increasing taxable income).
  5. Your personal tax returns might also require adjustments, potentially leading to higher taxes.
  6. You’ve paid for amended returns and potentially additional taxes.
  7. Now comes the wait: The IRS can audit payroll filings for up to 5 years.
  8. If the IRS disallows or reduces the credit, you’ll owe them back, with interest and potential penalties.
  9. Good luck finding the promoter for their cut.
  10. You might be forced to amend your tax returns yet again to repay the disallowed credit, potentially losing any refund you received on increased taxes due to the initial claim. This is because the IRS has a longer window (usually 5 years) to audit payroll filings compared to the shorter timeframe (typically 3 years) for claiming refunds on individual tax returns.

The Bottom Line: Don’t Be a Target

Claiming the ERC without proper qualification can be a costly mistake. Here’s what you should do:

  • Consult a tax professional: They can assess your eligibility and guide you through the claiming process if applicable.
  • Beware of aggressive marketing: Don’t fall for promises of easy money.
  • Do your research: Understand the qualifications and potential implications before claiming the credit.

By following these steps, you can avoid the financial pitfalls associated with misleading ERC claims and ensure you receive the tax relief you deserve if you’re truly eligible.

JS Morlu LLC is a top-tier accounting firm based in Woodbridge, Virginia, with a team of highly experienced and qualified CPAs and business advisors. We are dedicated to providing comprehensive accounting, tax, and business advisory services to clients throughout the Washington, D.C. Metro Area and the surrounding regions. With over a decade of experience, we have cultivated a deep understanding of our clients’ needs and aspirations. We recognize that our clients seek more than just value-added accounting services; they seek a trusted partner who can guide them towards achieving their business goals and personal financial well-being.
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