The IRS is cracking down on a popular small business tax break that could lead to a costly audit


A cottage business of specialist firms have sprung up in order to assist business owners with claiming the Employee Retention credit (ERC), an incentive provided by the government for businesses that are stressed out due to the pandemic. Businesses must be cautious not to fall for a scam.

There is a strict set of eligibility criteria for the ERC. One way to claim it is through wages paid in pandemic times when gross receipts were down. Many owners may not understand these requirements. They could lose out on up to $26,000 in credit per employee if they don’t take note of the eligibility criteria. Donald N. Hoffman is a partner at Eisner Advisory Group. He said that the problem is widespread because it’s so easy to apply for the credit. He said that “every business owner receives dozens of emails, mail and television ads.” The IRS reiterated this warning in March, citing “promoters who aggressively mislead businesses and people into believing they can claim these credit.” “

The IRS even went as far to include fraudulent claims involving ERCs to its annual list of tax scams, the “Dirty Dozen”. “The aggressive marketing and promotion of these credits are deeply troubling, and it is a major concern,” stated IRS Commissioner Danny Werfel. There are specific guidelines for these credits, and they’re not open to everyone. The IRS warned that these promotions could rely on inaccurate claims about credit eligibility or calculation. What’s more, some of these advertisements are designed to collect a taxpayer’s sensitive information, which is then used for identity theft purposes, the IRS said.

Here are important things owners need to know about the ERC to avoid issues, including in the worst-case scenario, an audit.

Start by understanding the basic ERC claim requirements

Start by knowing the basics so you can understand whether your business may qualify for a credit.

Eligible taxpayers can claim the ERC on an original or amended employment tax return for qualified wages paid between March 13, 2020, and Dec. 31, 2021, according to the IRS. The IRS says that businesses can qualify if their operations were suspended due to an order from the government to shut down because of a pandemic during the applicable time period. Businesses can be eligible for the credit if they experienced a decline in their gross receipts in either the first quarter of 2021 or in 2020. Another way to be eligible is if the company qualified as a “recovery startup business” — a business started during the pandemic — for the third or fourth quarters of 2021.

Businesses can still be eligible for the credit if they received PPP loan forgiveness, which some owners may not realize, said Gina Perrone, a senior tax manager at accounting, tax and advisory firm Sax LLP. The ERC originally did not allow this, but later it was revised. There are however, restrictions on double-dipping, which a tax professional can help ensure doesn’t happen.

Consult a CPA before signing with an ERC specialist

It’s very confusing for small businesses because of the various requirements, so it is advisable to consult with a CPA firm that is familiar with the ERC rules — even if a third party suggests the business automatically qualifies. It is important to understand the details and definitions to determine if a business qualifies.

For instance, the definition of gross receipts for credit purposes is the one used by the Small Business Administration, and it refers to the figure reported on your tax return, Hoffman said.

Certainly, don’t sign an agreement with a third party before consulting with a trusted and reputable financial professional.

Learn to spot the ERC red flags to avoid an audit

Even though a provider may make it sound “super simple,” there are many complicated factors in determining eligibility, said Jenn McCabe, partner at accounting and consulting firm Armanino. She warned businesses against any firm using pressure tactics to get them to act fast. These firms sometimes charge hefty upfront fees or a fee that is contingent on the refund amount.

Another red flag is when a third party doesn’t ask for documentation to ensure a business owner qualifies, Perrone said. The IRS does not require businesses to submit this documentation, but it is important to ensure that they qualify for the credit in order to avoid any costly problems later. Perrone explained that if the business was not eligible but received the credit, and later is audited, they will be required to pay back the money with penalties and interests. Perrone says that this can happen several years after the fact, but the business will have already paid to the third party, so it is unlikely they can recover the funds. If your business qualifies for the credit, you will need to file a tax return. Perrone stated that businesses will have until April 15th, 2024, to file for 2020. For 2021, the deadline is April 15th, 2025. Businesses that apply for the credit must also amend their tax returns in order to reflect the additional income. This is based on when they were eligible for the credit. Hoffman explained that businesses cannot simply report their income for the year in which they received cash.