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ERC Compliance Issues and Signs of ERC Fraud

September 05, 2023

Written by Complete Payroll

ERC Compliance Issues and Signs of ERC Fraud

On July 25th, a webinar was presented by the IRS to help businesses comply with Employee Retention Credit (ERC) requirements and avoid the consequences of ERC fraud. The IRS webinar also highlighted the rise of ERC schemes, which encourage businesses to file for the ERC even if they aren’t eligible.

What is the Employee Retention Credit?

Qualifying businesses and tax-exempt organizations can obtain the Employee Retention Credit, which is a refundable tax credit designed to provide relief for businesses that were affected by pandemic-related shutdowns.

Eligible organizations that paid employees after March 12, 2020, and before October 1, 2021 (or January 1, 2022, in the case of recovery start-up businesses) could obtain this tax credit. It’s actually still possible to apply for the ERC since the statute of limitations is five years from the third and fourth quarters of 2021.

In order to qualify for the ERC, a business would have to prove at least one of the following:

  • A government order had shut them down due to the pandemic in 2020, or in 2021 before October 1.
  • They met the threshold for a decline in gross receipts during the same period.
  • They qualified as a recovery startup business in the last two quarters of 2021.

Ensuring ERC Compliance

Businesses that apply for the Employee Retention Credit without being eligible may face penalties or even criminal charges from the IRS, which is why compliance is so important. During the webinar, the IRS identified were identified four key areas of ERC compliance:

  • If an employer already obtained tax or non-tax benefits (such as the Credit for Sick and Family Leave Wages), they won’t be eligible to file for the ERC.
  • If an employer already took advantage of the Paycheck Protection Program, they can’t also file for the ERC.
  • If an employer claimed the ERC on their tax returns, that must be reflected in the wages that are deducted from their income tax returns. 
  • If an employer paid wages to relatives of a majority owner of the business, those wages will be ineligible for the ERC.

What Are the Most Common Types of ERC Fraud?

When it comes to intentional fraud to obtain the Employee Retention Credit, there are three main types.

  • A fake business is set up in order to claim the ERC, using falsified records for employee wages that were never actually paid.
  • Identity theft is used to create business entities that apply for the ERC, usually with the Social Security numbers of people who are deceased or incarcerated.
  • Legitimate businesses make inflated or false ERC claims. This type of fraud can be caught by comparing income tax returns, employment tax returns, and W-2s or W-3s. If the IRS identifies inconsistencies, that could indicate ERC fraud.

Beware the "ERC Mill" Scheme

There’s also another type of Employee Retention Credit fraud, although it isn’t intentional on the part of the employer. This happens when a business falls prey to an ERC Mill scheme.

Here's how it Works:

  • A "wonderful" company advertises that they can help your company file your ERC claim, promising to get you a refund whether you qualify for one or not.
  • They will take an exorbitant fee to file; typically between 15-25% of the total amount of your refund. This is paid by you when they file, not when your refund payment comes.
  • If the IRS audits you and sees that you received an ERC payment and didn't qualify for one, you will be on the hook to repay not just the full amount of the ERC payment, but any penalties and fees levied by the IRS. This may include criminal charges. 
  • The "wonderful" company who "helped" you gets away, scott-free, with the fee you paid them, leaving you holding the bag. 

What Happens if a Business Gets a Fraudulent Refund Through an ERC Scheme?

If your business falls prey to one of these schemes, it’s still possible to avoid IRS penalties. The most important part is to document every step, so that the business can prove to the IRS that they did their part to fix the situation.

In the IRS webinar, businesses who accidentally got involved in an ERC scheme (and received a refund) were advised to take their checks to an IRS Taxpayer Assistance Center and explain the situation to an IRS representative. They’ll also have to amend their tax return, which will prove that they took the necessary steps to make things right.

How to Report ERC Fraud

There isn’t a voluntary disclosure program specifically for the Employee Retention Credit, but there are several ways to report potential fraud. These include:

  • Form 3949-A (Information Referral)
  • Form 14242 (Report Suspected Abusive Tax Promotions or Preparers)
  • Form 14157 (Return Preparer Complaint)

Staying ERC compliant and avoiding fraud isn’t that difficult, especially for businesses that make sure they use legitimate tax preparers. By staying on top of IRS regulations, eligible businesses can benefit from the Employee Retention Credit and avoid audits or penalties.

Let Complete Payroll Handle Your ERC Filing 

At Complete Payroll, we are committed to combating these unfair practices and ensuring that no business falls victim to deceptive services or excessive fees. Our goal is to guide you through the ERC claim process with transparency, integrity, and genuine support.

If you would like to learn more about our ERC Filing Service or need assistance in determining your eligibility, please visit our ERC Page for additional information.


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