The IRS Is Warning Small Business Owners to Watch Out for This Scam

At the height of the COVID-19 pandemic, with unemployment rates rising, Congress introduced a tax break to help businesses keep their doors open and their employees working. Now, over three years later, that same program is being used by scammers to defraud small business owners. Read on to learn more about the Employee Retention Tax Credit and how you can steer clear of scams using its name.

What is the Employee Retention Credit?

The Employee Retention Credit, or ERC, is a refundable tax credit available to certain businesses that operated during the COVID-19 emergency. Those businesses that retained employees amid the economic uncertainty of the pandemic may be eligible to claim a tax credit on a per-employee basis.

Eligibility for the credit is generally contingent upon a business being directly affected by the pandemic. Businesses that were shut down by government order during the early stages of the outbreak are eligible for the credit. Alternatively, businesses that experienced a high degree of revenue loss during that period may also qualify. Additionally, certain start-up businesses with employees may qualify for the credit.

Which businesses qualify and how much they qualify for has been revised in four pieces of legislation, from the CARES Act in March 2020 to the late 2021 infrastructure spending bill. Businesses generally must have met eligibility requirements during the height of the pandemic, between mid-March 2020 and September 2021. The credit is generally calculated as a percentage of wages paid, with a total benefit of up to $5,000 per employee for wages paid during 2020, and up to $7,000 per employee for wages paid during the first three quarters of 2021.

ERC scams

The complexity of the Employee Retention Credit, and conflicting instructions over the years, have resulted in a wide range of scams relating to the credit. Fraudulent claims have become so prolific that the IRS added ERC scams to its list of infamous scams called the "Dirty Dozen."

ERC scams have run rampant in recent years largely due to unclear guidance on the credit. The Employee Retention Credit has changed dramatically since it was introduced originally in the March 2020 CARES Act -- it was modified three different times in 2021 alone. Each revision of the credit substantially changed eligibility requirements and benefit amounts.

ERC scams are aggressively advertised to business owners as an easy way to retroactively cash in on government assistance during the pandemic. Often, a scammer will charge a fee to help a business owner file an ineligible claim for the credit, and be long gone before the IRS rejects the claim. The idea that there is "nothing to lose" by filing a false claim is incorrect -- claims that are denied must be repaid, often with interest and penalties.

How to protect yourself

The IRS warns taxpayers to view unsolicited tax credit advertisements with skepticism. Those that offer easy applications and high upfront fees are especially suspect. If you believe you have been approached by a fraudster, the IRS requests that you report them to the Criminal Investigations department.

Successfully qualifying for the Employee Retention Credit is not as easy as scammers make it out to be, and mistakenly claiming the credit can land you in hot water with the IRS. There is a lot of nuance regarding which businesses are eligible and for how much of a credit. When in doubt, consult a trusted tax expert and only apply for the benefit if you believe you are legitimately eligible.

The Employee Retention Credit offers a financial benefit for businesses that paid employees during the pandemic. Scams naming this tax credit are on the rise and can cost businesses thousands of dollars in fraudulent fees and IRS penalties. When in doubt, turn to a trusted professional for tax advice, and always exercise a critical eye.