Beware of Employee Retention Credit Scams

By David Donnelly, CPA-Houston, and Anna Johnson, CPA-Houston

Judging by the calls that tax professionals have been receiving, many employers are receiving numerous solicitations from vendors to help the employer claim the Employee Retention Credit (ERC) as provided for in the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the Taxpayer Certainty and Disaster Tax Relief Act (the “Relief” Act).  

There are many reputable vendors offering these services; however, there appear to be some disreputable vendors offering questionable services. Their scam follows the traditional format—sell the client a service that is flawed and disappear before the client finds out.

The basic scam is as follows:

• The vendor convinces the employer that they qualify for the ERC even if gross receipts did not decline.
• The vendor prepares the forms to apply for the tax credits for a fee that is a percentage of the claimed credit, usually 20% to 35%.
• The payment to the vendor for the services is required when the forms are completed and filed.
• The vendor will offer a guarantee that the credit will be received.

There are at least two flaws in this pitch—first, the employer may not qualify for the ERC and second, the guarantee only works if the vendor is still in business and can be found.

The basic requirement for qualification for the ERC is that there was a significant decline in gross receipts. For 2020, this decrease has to be 50% compared to the same quarter in the previous year; for 2021, this decrease has to be 20% compared to the same quarter in the previous year.   

There are many other factors that determine qualification, a discussion of which is beyond the scope of this article.

There is a provision in the guidance that allows the credit if “the operation of the trade or business…is fully or partially suspended due to orders from an appropriate government authority limiting commerce, travel or group meetings…due to COVID-19… .” (see Notice 2021-20).

The dubious vendors will advise the employers that they qualify under this “government authority” clause regardless of the effect the pandemic had on their business. An argument that they make is that “if your employees had to work remotely, you qualify.” This is not the case. There has to be specific governmental orders restricting commerce. An example of a specific order is when a state or local government requires bars or restaurants to be closed. 

The IRS is examining many of the claims for refund. Presumably, those filed under the “appropriate government authority” will attract extra scrutiny.

In order to protect themselves from this scam, employers should be alert for the following:

• A newly formed or newly organized vendor,
• A vendor with no professional qualifications, or
• A vendor claiming that the employer qualifies under the “appropriate government authority” clause.

The IRS has addressed these scams in the Oct. 19, 2022 news release IR-2022-183.

CPAs can help their clients avoid these scams by properly advising them about their qualification for the ERC and, if necessary, researching the vendors that the client may be considering.

Resources:

Report ERC credit mills

• Form 3949-A (Rev. 10-2020) (irs.gov) 
• Hotline | U.S. Treasury Inspector General for Tax Administration OIG (tigta.gov)

Employee retention credit: Your questions answered | Resources | AICPA (members only)