The Internal Revenue Service is warning employers to be wary of third parties who are advising them to claim the Employee Retention Credit (ERC) when they may not qualify. Some of these third parties are taking improper positions related to taxpayer eligibility for and computation of the credit.

The IRS wrote:

“These third parties often charge large upfront fees or a fee that is contingent on the amount of the refund and may not inform taxpayers that wage deductions claimed on the business’ federal income tax return must be reduced by the amount of the credit.

If the business filed an income tax return deducting qualified wages before it filed an employment tax return claiming the credit, the business should file an amended income tax return to correct any overstated wage deduction.”

R&A recommends that business owners be cautious. Promises of tax savings that sound too good to be true, probably are. And it is the taxpayer that is responsible for the information reported on their tax returns. Taxpayers that improperly claim the ERC could be required to repay the credit along with penalties and interest—and the IRS has five years in which to audit returns for improper claims.

What is the ERC?

The ERC is a refundable tax credit designed for businesses who continued paying employees while shutdown due to the COVID-19 pandemic or had significant declines in gross receipts from March 13, 2020, to December 31, 2021. Eligible taxpayers can claim the ERC on an original or amended employment tax return for a period within those dates.

There are very specific rules for employers to be eligible for the ERC, and only recovery startup businesses are eligible for the ERC in the fourth quarter of 2021. Additionally, for any quarter, eligible employers cannot claim the ERC on wages that were reported as payroll costs in obtaining PPP loan forgiveness or that were used to claim certain other tax credits.

If a business is eligible to claim the ERC, it can be a valuable credit, but the rules are complicated. Contact your R&A professional to help determine your eligibility and to file for the credit if it applies to your business.