The IRS Has Temporarily Stopped Processing New ERC Claims. Auditors Are Searching for Fraudulent Claims.
The employee retention credit (ERC) was designed to help businesses that paid employees during the COVID pandemic, but unfortunately, unscrupulous tax preparers have convinced businesses to file billions of dollars in fraudulent claims. The result — many businesses are now being required to pay back the claims plus penalties.
The IRS has been warning the public about ERC mills for over a year, but in September 2023, the agency went a step further and put a moratorium on processing new ERC claims. What does this all mean? Should you be worried if you claimed this credit? Should you avoid claiming this credit? The answers depend on the situation.
To help you out, this post dives into ERC scams and explains what business owners need to consider about ERC mills. To get help now, contact us at Damien’s Law today.
What Are ERC Mills?
ERC mills are companies that launched with the sole purpose of helping people apply for the ERC. These companies were notorious for coercing people into applying even if they didn’t really qualify. In many cases, they lied to their clients, and they typically charged a contingency fee based on the value of the credit.
Results of Working With ERC Mills
If you erroneously claimed an ERC due to working with a mill, you will be subject to tax liabilities plus interest and penalties. Here’s an overview of what happened to many businesses that worked with ERC mills:
- Received a credit for paying wages.
- Paid about 25% of the credit as a fee to the ERC mill.
- Selected for an IRS audit and told the credit was illegitimate.
- Incurred a tax bill for the credit, plus penalties.
- Were unable to find the ERC mill to get the contingency fee back.
Between 2020 and 2021, these credits were worth up to $26,000 per employee. Thus, even a business with just 10 employees may lose over a quarter of a million in credits. Then, audit penalties can ratchet this number even higher. Aware of the potential strain on businesses, the IRS is considering a settlement program.
ERC Settlements
Did the IRS disallow your employee retention credit? Are you facing an unexpected tax bill as a result of an ERC audit? Then, you may need to explore tax settlement options. Generally, it’s nearly impossible for an in-operation business to get a tax settlement, but the IRS has announced intentions to create a settlement program for businesses that were scammed into claiming the ERC.
As of October 2023, the IRS has not finalized settlement options for disallowed ERC claims, but you may want to look into penalty abatement or installment plans. Or contact us for the most up-to-date guidance on these proposed settlements.
Red Flags of ERC Mills
Whether you claimed the credit already or are still considering claiming it, you may be wondering if you’re working with an ERC mill. Here are the red flags of ERC mills as described by the IRS:
- Claims the ERC has an easy application process.
- Tells you that you qualify without getting any information.
- Says they can let you know if you qualify in just minutes.
- Doesn’t ask you about Paycheck Protection Program (PPP) loans.
- Charges big upfront fees to claim the credit.
- Assesses fees based on a percentage of the credit.
- Refuses to sign your tax return on the preparer line.
If you have a legitimate ERC claim, then, you shouldn’t leave that money on the table. You should absolutely claim the credit if you qualify. But rather than working with one of these companies, you should look for a trusted tax professional.
Don’t work with a company that was just created to claim this credit. Instead, work with an accountant or tax attorney who specializes in taxes all the time, not just when there’s a credit to exploit.
What If You Worked With an ERC Mill?
If you worked with an ERC mill, you have a few different options depending on where you are in the process. Take a look:
Thinking about making an ERC claim
If the company you’re talking with has any of the above red flags, don’t move forward. Instead, contact a trusted local CPA or tax attorney and ask for their advice. Be especially suspicious if the company tries to strong-arm you into making a claim after you’ve expressed your concerns.
Waiting for the IRS to process your claim
If you aren’t sure whether or not your claim is legitimate, you may want to have a tax attorney review your claim. They can talk with you about your situation and advise you about the legitimacy of your claim.
If you know that your claim is not legitimate, you can withdraw it. The IRS has created special withdrawal rules related to ERC claims. You can even withdraw a claim that has been selected for audit.
Dealing with a disallowed claim
If the IRS has already completed an ERC audit and disallowed your claim, you should talk with a tax professional. You may be able to contest the audit or apply for a settlement if there are no grounds for appeal. You should also consider reporting the ERC mill that helped you claim the credit and applying for relief from any penalties added to your account.
Can You Still Claim the ERC Credit?
As of September 2023, the IRS has placed a moratorium on processing tax returns with ERC claims. This just means that the agency is not processing any new claims until the end of the year. You can still apply for an ERC as long as the ERC statute of limitations hasn’t passed, but the IRS won’t even be looking at your tax return for a while so don’t expect a quick response.
At the time of writing, the IRS is taking up to 180 days to process most ERC claims. The agency was taking just 90 days, but now, the IRS has advised employees to give additional scrutiny to these claims. Some estimates put the number of fraudulent claims as high as 95%. Due to the scams, the IRS is also auditing returns that have already been processed at extremely high rates.
Can You Go to Jail for ERC Fraud?
If you are a business owner who was duped into claiming the ERC fraudulently, you are not likely to face jail time. However, it can be a risk. You are responsible for the information on your tax returns regardless of whether or not you paid someone else to prepare them.
As of July 31, 2023, the Criminal Investigation unit of the IRS has referred 252 cases to the Justice Department related to $2.8 billion in potential ERC fraud. So far, 15 of those cases have led to federal charges. There have been six convictions and four of them involved jail time with an average sentence of 21 months.
What If Your ERC Gets Audited
If your ERC has been selected for an audit, you should reach out for audit defense. A tax attorney can guide you through the ERC audit process as easily and painlessly as possible. First, however, you may want the attorney to review your ERC claim. If it is not legitimate, they may advise you to withdraw your claim rather than going through the audit.
Get Help With ERC Claims, ERC Audits, and Tax Fraud Investigations
The ERC credit was very valuable for employers who had a legitimate claim to the credit. For many others, ERC mills have turned this credit into an expensive nightmare.
Have you been selected for an audit? Worried about tax fraud charges? Curious about withdrawing an ERC claim? Regardless of where you are in this process, we can help you out.
At Damien’s Law, we’ve been following the ERC since day one. We’ve helped many companies claim this credit, navigate ERC audits, and withdraw fraudulent claims. To get guidance now, contact us today.
