IRS Bolsters Employee Retention Credit Enforcement

The Employee Retention Tax Credit (ERTC) is one of the remaining federal tax incentives left over from the pandemic era. Although the program is no longer in effect, taxpayers can continue to file retroactive claims. This is certainly good news for eligible businesses that previously did not claim the savings. At the same time, it has also opened the door to unscrupulous ERTC mills and others falsely promising huge tax savings to unsuspecting business owners. The result has been a sharp increase in the number of fraudulent ERTC claims. In fact, the IRS has already identified over 11,000 fraudulent returns.

Given the ongoing nature of the problem, the IRS continues to bolster efforts to protect taxpayers and uncover fraud. Specifically, it was recently announced that hundreds of employees have been trained to conduct ERTC audits. Since a payroll tax return can be audited for up to 5 years, this move will make it easier to identify such claims. Concurrently, there has also been a new process announced for the anonymous reporting of ERTC fraud. To help clients, prospects, and others, Wilson Lewis has provided a summary of the key details below.  

The Rise of ERTC Mills

During the last two years, many ERTC mills – third-party companies often without qualified tax professionals – have popped up. Most of the time, ERTC mills were formed within the past two years. These companies tend to use aggressive marketing campaigns, promising to get money back for clients. In exchange, the ERTC mill may require a percentage fee based on the total refund amount or a large commission, often upwards of 25 percent. Radio commercials and online ads attract new clients and then the company compels the business owner to file wrong or overstated claims.

Examples of how these bad actions mislead customers is by using incorrect government orders to substantiate claims, overstating wages, and misusing the supply chain provision. 

Even if a business uses a third-party vendor to calculate and file its ERTC claim, the business itself is responsible for the information on its tax return. Knowingly or not, these unscrupulous business practices have made millions of small businesses liable for tax fraud.

ERTC Audits

Whether a return is flagged by the IRS or its new anonymous reporting mechanism, a business subject to an ERTC audit can expect to provide substantial information to the IRS agent. Documentation includes but may not be limited to:

• Copies of Form 941 or 941-X workpapers
• Information on how the company calculated its gross receipts test or government shutdown test
• The average number of full-time employees in the previous period referenced in the ERTC filing; for example, a third quarter 2020 ERTC filing would reference the employee count in the third quarter of 2019
• ERTC calculation
• Aggregated group rules
• PPP loan information, if applicable

A good rule of thumb is to file ERTC claims with the expectation that the return will be audited. That means keeping thorough, detailed records at every stage of the process. Working with CPAs and licensed financial professionals is the best way to ensure that any ERTC audit doesn’t uncover anything that’s questionable.

The IRS is increasing enforcement in this area. Industry professionals have noted the exam staff have been instructed to closely inspect each claim. It’s estimated that fraudulent claims will dwarf PPP loan fraud when everything settles.

If a business is found to have made a mistake, it may be liable to repay any excess refund amount plus penalties and interest. There are options for first-time offenders, but it’s a process that most businesses want to avoid. When a business self-corrects a mistake, the IRS may waive penalties and/or fines. Audits or anonymous reports of ERTC fraud are liable for additional IRS enforcement actions.

Reporting ERTC Fraud

An existing IRS form has now been updated to make it easier to report suspected ERTC fraud. Form 3949-A: Information Referral can be submitted anonymously, though sometimes it helps if the whistleblower provides contact information. The form will request detailed information about the individual or business being reported. As much detail as can be provided, the better, like employer identification or social security number, name, address, phone number(s), and more.

Common Errors Claiming the ERTC

Often, ERTC mills will overstate wages, misinterpret the government shutdown test, apply the wrong units of measurement to the gross receipts test, or abuse the supply chain provision. While the supply chain provision is a legitimate way to claim ERTC, it is also heavily scrutinized. The IRS provided a clear example of when the supply chain provision would apply in the Frequently Asked Questions of Notice 2021-20.

Other examples of situations that can cause an unsubstantiated ERTC claim are:

• Other business hardships or general disruptions
• Labor shortages
• Lack of demand
• Higher costs and/or lower profits – note that the gross receipts test measures top-line revenue, not profits)
• Difficulty meeting COVID-19 preparedness or preventative measures

Contact Us

The Employee Retention Tax Credit provides a compelling savings opportunity for Atlanta companies that qualify. However, it is important to be aware of the unsavory increase in misleading advertising. For this reason, it is important to work with a CPA to ensure your claim is properly prepared and will hold up against an IRS examination. If you have questions about the information outlined above or need assistance with an accounting or tax issue, Wilson Lewis can help. For additional information call 770-476-1004 or click here to contact us. We look forward to speaking with you soon.