Employee Retention Credit: A Beacon of Hope or a Magnet for Fraud?
In the wake of the global pandemic, the U.S. government introduced the Employee Retention Credit (ERC) as a lifeline for businesses. This refundable tax credit was designed to incentivize companies to retain their employees during the tumultuous times of COVID-19. However, while many businesses have benefited from this relief, the ERC has also attracted a slew of fraudulent activities.
The ERC operates by offering eligible employers a credit of 50% on up to $10,000 in wages, translating to a potential $5,000 per employee in 2020 and up to $21,000 in 2021. To qualify, businesses must demonstrate that they were either shut down by a government mandate during specific periods or experienced a significant drop in gross receipts. Despite its noble intentions, the allure of such substantial credits has not only attracted genuine businesses but also unscrupulous actors.
The American Institute of CPAs (AICPA) has been a vocal advocate against these fraudulent practices. Over the past two years, they’ve consistently liaised with the IRS and the Department of the Treasury, highlighting concerns about dubious third-party vendors. These vendors, often termed as ‘credit mills’, have been aggressively promoting the ERC, sometimes to businesses that are either ineligible or qualify for a reduced credit. The modus operandi of these mills includes charging exorbitant upfront fees, sometimes as high as 30% of the claimed credit.
The Oversight Subcommittee of the House Ways & Means Committee convened a hearing on July 2023 to address these concerns. Testimonies from tax professionals, including CPAs, painted a grim picture of the rampant fraud in the ERC system. The committee members, cutting across party lines, expressed their dismay and sought solutions to support CPAs in their fight against these fraudulent entities.
The AICPA has been proactive in this matter, providing resources and insights to its members about the red flags associated with these credit mills. They caution businesses against vendors demanding large upfront fees and those not signing the amended payroll tax returns. Melanie Lauridsen, Vice President of Tax Policy & Advocacy with the AICPA, emphasized the plight of businesses and CPAs. She stated, “While many CPAs have shielded their clients from these predatory mills, numerous businesses continue to fall prey. It’s imperative for businesses to scrutinize offers, especially those promising hefty refunds based on contingency fees.”
The IRS, too, has taken note of the situation. Earlier this year, they flagged ERC scams in their annual ‘Dirty Dozen’ list. IRS Commissioner Danny Werfel highlighted the agency’s renewed focus on scrutinizing dubious ERC submissions and warned against aggressive marketing tactics. He remarked, “The sheer volume of misleading marketing around this credit is alarming. It’s creating a myriad of challenges for tax professionals, the IRS, and even businesses.”
The numbers speak for themselves. Since its inception, the IRS has received over 2.5 million ERC claims. While they’ve made significant headway in processing these claims, a substantial number of amended payroll returns remain unprocessed. The IRS’s Criminal Investigation division is also actively identifying and acting against fraudulent claims and their promoters.
In conclusion, while the ERC was conceived as a beacon of hope for businesses during challenging times, it has inadvertently become a magnet for fraud. Both the AICPA and the IRS are working diligently to ensure that genuine businesses benefit while keeping fraudsters at bay. As the window for claiming these credits narrows, businesses are urged to exercise caution and seek guidance from trusted professionals.
“Pop culture advocate. Troublemaker. Friendly student. Proud problem solver.”
