The Employee Retention Tax Credit (ERTC), also known as the Employee Retention Credit (ERC), is one of the few significant COVID-19 relief options that could still be advantageous for eligible businesses. But the rollout of the ERC was complex and subject to significant changes, which led to the rise of questionable companies creating confusion among business owners. Many of these companies have appeared on the internet, in radio ads, and robocalls urging companies to contact them quickly to apply for the credit before time runs out.
The ERC does sound too good to be true. It can be a tremendous benefit if your business qualifies—but in some cases, that’s a big IF. In this blog, we’re addressing some red flags to watch out for when it comes to ERC promises.
Many businesses struggled to retain employees during the pandemic. To help counter the economic effects of national and state lockdowns, the government provided pandemic-related tax credits, such as the Employee Retention Credit (ERC). To help small to midsize business owners retain employees throughout the pandemic, the ERC offered refundable tax credits equal to 50% of $10,000 in qualifying wages per employee for the year. Eligible employers could gain immediate access to the credit by reducing their quarterly employee tax payments. Later, the American Rescue Plan Act expanded and enhanced the ERC by increasing the credit to 70% of $10,000 in qualifying wages per employee per quarter for the first, second, and third quarters of 2021.
What are some ERC scam red flags?
There’s been an uptick of companies (from within and out of the industry) telling every business that it qualifies for the ERC while performing little to no due diligence. It’s wise to be wary of these claims, which could land you in hot water with the IRS or cause you to pay more than you should for their services. Many companies looking to “help” you claim the ERC charge high fees. Some have imposed fees in excess of 25% of the potential credit.
Watch-out for companies advertising on the radio or cold calling you to tell you that you qualify, just because you happen to be a restaurant or school. Every business should be evaluated on its own merits and circumstances. And if a salesperson says that the ERC process will be quick, be skeptical—the IRS has often taken several months or longer to process claims and issue the funds.
The IRS is watching ERC claims
Many people want to know: will claiming the ERC trigger an audit? We know that the IRS is already checking recipients of the Paycheck Protection Program (PPP) and other COVID-19 relief dollars for fraud, and Accounting Today recently reported that the IRS and AICPA have called for a crackdown on ERC claims.
If your business received the Employee Retention Credit without qualifying properly, you and your business that will be at fault—not the company that helped you claim the credit. Keep in mind that the IRS has a number of years to challenge ERC claims and that an audit may arise years from now. Please consider using a well-established company that you’re confident will be around to provide you with the appropriate guidance if you’re asked to substantiate the amount and your eligibility for the credit.
ERC Eligibility Explained
The IRS will be looking for you to satisfy specific criteria for ERC eligibility, so don’t listen to companies that say everyone qualifies. Determining whether your business is eligible for the ERC can be a rather complex process. A professional firm will check that your business is eligible before proceeding, saving everyone time and money in the long run.
Key questions to ask about ERC eligibility:
- Did your company experience a significant decline in gross receipts? Compare your quarterly revenue from 2019 to 2020—were your 2020 revenues less than half of what they were in 2019? For 2021, were your revenues less than 80% of what they were in 2019 for the same quarter?
- Was your company subject to a federal, state, or local government order related to COVID-19? Did that order impair your ability to conduct business? If so, your business might qualify for the ERC in full or in part. Eligibility varies depending on your company’s specific circumstances.
Again, if a COVID-19 related government order had more than a nominal impact on the business, you may be eligible to apply and it’s worth consulting a professional to make sure.
How to spot an ERC charlatan
Every crisis seems to bring out the scammers. Be savvy at ferreting out potential bad actors by doing a little research on any company selling you Employee Retention Credit services. Here are the due diligence questions we recommend validating for any ERC service provider:
- Have they been doing accounting or tax work for more than a year or two?
- Does the company have experience working with the IRS?
- Can they provide support to your business in the case of an audit or examination?
- Is their company URL a string SEO keywords?
- Is the URL or organization state-specific? (This can be a red flag because the ERC is a federal program.)
- Do they charge contingency fees?
Speak to a professional CPA about the ERC
If you have not applied for the Employee Retention Credit and believe you may have qualified, have one of our professional CPAs prepare your returns. Not only can we help you determine your eligibility, but we can also talk you through the potential cash flow and tax implications of the ERC. Contact us to schedule a consultation.