In late October the IRS issued a warning to employers to be on the lookout for unscrupulous parties who advise them to claim the employee retention credit (ERC).  The IRS has found that these parties are taking improper positions regarding the employers’ eligibility for the ERC and in the computation of the ERC. The parties promoting the scheme will either charge a large fee up front or take a percentage of the amount refunded to the employer as a result of the ERC claim.

The parties promoting the ERC scheme fail to explain to the employer that the deduction taken by the employer on the business’s income tax return for wages paid to employees must be reduced by the amount of the credit claimed. An employer who filed the business income tax return and deducted wages which qualify for the ERC must first amend the income tax return to correct the overstated wage deduction and then claim the ERC on the business’s employment tax return. In addition, these parties fail to explain that the ERC cannot be claimed on wages that were reported as payroll costs in obtaining a PPP loan forgiveness or on wages that were used to claim other tax credits.

What is the employee retirement credit? The ERC is a refundable credit available to businesses who continued paying their employees while the business was shut down due to the COVID pandemic. The credit is also available to businesses who had significant declines in gross receipts from March 13, 2020 to December 31, 2021. A business eligible to claim the ERC may do so on an original, or amended, employment tax return for a period within the dates specified.

In order to be eligible for the ERC an employer must have:

• Fully or partially suspended business operations during 2020 or the first three quarters of 2021 as a result of orders from a governmental authority limiting commerce, travel, or group meetings as a result of the COVID pandemic,
• Experienced a significant decline in gross receipts during 2020 or the first three quarters of 2021, or
• Qualified as a recovery startup business in the third or fourth quarters of 2021. Only a recovery startup business is eligible to claim the ERC in the fourth quarter of 2021.

For more information regarding the ERC and eligibility requirements see:

https://magdaabdogomezlaw.com/employee-retention-credit/

https://magdaabdogomezlaw.com/amendments-covid-related-tax-laws/

https://www.irs.gov/newsroom/employee-retention-credit-2020-vs-2021-comparison-chart

An employer who is approached by someone with the promise of a monetary windfall from the IRS should question the validity of the claim being made and act with caution. An employer who claims the ERC when ineligible to make the claim will be responsible for the information reported on the filed tax return. The employer will find itself liable for repaying the credit to the IRS and may also be liable for penalties and interest. If you have been approached by someone promoting the ERC scheme, you can report the illegal activity using the following form: https://www.irs.gov/pub/irs-pdf/f3949a.pdf