The IRS has recently issued a news release[1] to inform businesses about the growing concern of overly aggressive employee retention tax credit (ERC) promoters. Within this statement, the IRS highlights key indicators that employers should be mindful of in order to identify potential promoters engaging in questionable practices. Furthermore, the statement sheds light on the tactics employed by these promoters to attract employers and offers valuable suggestions on how businesses can safeguard themselves against potentially costly errors that may arise from claiming an ERC credit without meeting the eligibility criteria.

Current Problem in the View of the IRS

The news release commences by addressing the ongoing challenges observed by the IRS in relation to consultants who employ aggressive tactics to persuade employers into submitting refund claims associated with the ERC:

The IRS and tax professionals continue to see a barrage of aggressive broadcast advertising, direct mail solicitations and online promotions involving the Employee Retention Credit. While the credit is real, aggressive promoters are wildly misrepresenting and exaggerating who can qualify for the credits.

…

“The aggressive marketing of the Employee Retention Credit continues preying on innocent businesses and others,” said IRS Commissioner Danny Werfel. “Aggressive promoters present wildly misleading claims about this credit. They can pocket handsome fees while leaving those claiming the credit at risk of having the claims denied or facing scenarios where they need to repay the credit.”[2]

The IRS has announced its proactive measures to initiate audits and criminal investigations into claims that exhibit a questionable foundation:

The IRS has stepped up audit and criminal investigation work involving these claims. Businesses, tax-exempt organizations and others considering applying for this credit need to carefully review the official requirements for this limited program before applying. Those who improperly claim the credit face follow-up action from the IRS.[3]

The IRS cautions employers against adopting the notion that requesting the credit "just in case" would be inconsequential. They emphasize that it is unwise to assume that claiming the credit without meeting the eligibility requirements would have no negative repercussions.

The IRS reminds anyone who improperly claims the ERC that they must pay it back, possibly with penalties and interest. A business or tax-exempt group could find itself in a much worse cash position if it has to pay back the credit than if the credit was never claimed in the first place. So, it’s important to avoid getting scammed.[4]

IRS Warning Signs of Aggressive ERC Marketing

The IRS presents a comprehensive list of aggressive marketing techniques that employers should be cautious of when considering the use of such services. The outlined methods serve as warning signs and aim to raise awareness among employers to exercise vigilance in their decision-making process.

• Unsolicited calls or advertisements mentioning an “easy application process.”

• Statements that the promoter or company can determine ERC eligibility within minutes.

• Large upfront fees to claim the credit.

• Fees based on a percentage of the refund amount of Employee Retention Credit claimed. This is a similar warning sign for average taxpayers, who should always avoid a tax preparer basing their fee on the size of the refund.

• Aggressive claims from the promoter that the business receiving the solicitation qualifies before any discussion of the group’s tax situation. In reality, the Employee Retention Credit is a complex credit that requires careful review before applying.

• The IRS also sees wildly aggressive suggestions from marketers urging businesses to submit the claim because there is nothing to lose. In reality, those improperly receiving the credit could have to repay the credit – along with substantial interest and penalties.[5]

The IRS concludes this section by warning:

These promoters may lie about eligibility requirements. In addition, those using these companies could be at risk of someone using the credit as a ploy to steal the taxpayer’s identity or take a cut of the taxpayer’s improperly claimed credit.[6]

IRS Outlines Ways Unscrupulous Promoters Lure Their Victims

The IRS next provides a list of methods used by the unscrupulous to convince their victims to use their services:

• Aggressive marketing. This can be seen in countless places, including radio, television and online as well as phone calls and text messages.

• Direct mailing. Some ERC mills are sending out fake letters to taxpayers from the non-existent groups like the “Department of Employee Retention Credit.” These letters can be made to look like official IRS correspondence or an official government mailing with language urging immediate action.

• Leaving out key details. Third-party promoters of the ERC often don’t accurately explain eligibility requirements or how the credit is computed. They may make broad arguments suggesting that all employers are eligible without evaluating an employer’s individual circumstances.

  • For example, only recovery startup businesses are eligible for the ERC in the fourth quarter of 2021, but promoters fail to explain this limit.

  • Again, the promoters may not inform taxpayers that they need to reduce wage deductions claimed on their business’ federal income tax return by the amount of the Employee Retention Credit. This causes a domino effect of tax problems for the business.

• Payroll Protection Program participation. In addition, many of these promoters don’t tell employers that they can’t claim the ERC on wages that were reported as payroll costs if they obtained Paycheck Protection Program loan forgiveness.[7]

IRS Recommendation on How Businesses Can Protect Themselves

The IRS concludes by providing a set of recommended steps that employers should take in order to safeguard themselves:

• Work with a trusted tax professional. Eligible employers who need help claiming the credit should work with a trusted tax professional; the IRS urges people not to rely on the advice of those soliciting these credits. Promoters who are marketing this ultimately have a vested interest in making money; in many cases they are not looking out for the best interests of those applying.

• Don’t apply unless you believe you are legitimately qualified for this credit. Details about the credit are available on IRS.gov, and again a trusted tax professional – not someone promoting the credit – can provide critical professional advice on the ERC.

• To report ERC abuse, submit Form 14242, Report Suspected Abusive Tax Promotions or Preparers. People should mail or fax a completed Form 14242, Report Suspected Abusive Tax Promotions or Preparers, and any supporting materials to the IRS Lead Development Center in the Office of Promoter Investigations.[8]

[1] “IRS alerts businesses, tax-exempt groups of warning signs for misleading Employee Retention scams; simple steps can avoid improperly filing claims,” IRS News Release IR-2023-105, May 25, 2023, https://www.irs.gov/newsroom/irs-alerts-businesses-tax-exempt-groups-of-warning-signs-for-misleading-employee-retention-scams-simple-steps-can-avoid-improperly-filing-claims (retrieved May 28, 2023)

[2] “IRS alerts businesses, tax-exempt groups of warning signs for misleading Employee Retention scams; simple steps can avoid improperly filing claims,” IRS News Release IR-2023-105, May 25, 2023

[3] “IRS alerts businesses, tax-exempt groups of warning signs for misleading Employee Retention scams; simple steps can avoid improperly filing claims,” IRS News Release IR-2023-105, May 25, 2023

[4] “IRS alerts businesses, tax-exempt groups of warning signs for misleading Employee Retention scams; simple steps can avoid improperly filing claims,” IRS News Release IR-2023-105, May 25, 2023

[5] “IRS alerts businesses, tax-exempt groups of warning signs for misleading Employee Retention scams; simple steps can avoid improperly filing claims,” IRS News Release IR-2023-105, May 25, 2023

[6] “IRS alerts businesses, tax-exempt groups of warning signs for misleading Employee Retention scams; simple steps can avoid improperly filing claims,” IRS News Release IR-2023-105, May 25, 2023

[7] “IRS alerts businesses, tax-exempt groups of warning signs for misleading Employee Retention scams; simple steps can avoid improperly filing claims,” IRS News Release IR-2023-105, May 25, 2023

[8] “IRS alerts businesses, tax-exempt groups of warning signs for misleading Employee Retention scams; simple steps can avoid improperly filing claims,” IRS News Release IR-2023-105, May 25, 2023