Every year, the IRS compiles and shares its Dirty Dozen list of tax scams. It’s a “worst of the worst” list—intended to caution and protect susceptible taxpayers by turning the spotlight on trending schemes among fraudsters and con artists. On March 20, 2023, the IRS rolled out this year’s Dirty Dozen, and the Employee Retention Credit (ERC) made its debut on the list.
Of course, anyone paying attention over the last year is not the least bit surprised to see the ERC featured on the 2023 Dirty Dozen list. Since last fall, the IRS has issued multiple warnings to employers about improper ERC claims. Additionally, the IRS recently issued guidance, via the Office of Professional Responsibility (OPR), which is aimed to ensure that practitioners are cognizant of their Circular 230 professional responsibilities and high standards for tax return preparation and execution in the ERC context.
Frost Law regularly echoes these IRS warnings and emphasizes the importance of entrusting all ERC analyses and claim procedures with trained and trustworthy practitioners and preparers—i.e., those who are cognizant of the high standard of conduct to which they are held and the penalties for any violation of such standards. Certainly, we will continue to maintain this stance; however, we also strive to provide some much needed perspective here, because it is crucial that bad actors’ consequences don’t dissuade those eligible ERC employers from properly claiming what Congress intended for them to obtain.
With that in mind, we urge our readers here to consider below: (1) how and why the ERC originated, and (2) how trained and trustworthy practitioners using a sophisticated process aligned with Congress’s overall objective are best suited to help eligible businesses optimize ERC relief potential, while minimizing audit risk.
Remember, Congress created the ERC, and, from the beginning, Congress intended for the ERC to operate as a refundable tax credit that could offer potentially business-saving relief to those eligible employers who kept employees on payroll during the pandemic. Significantly, this ERC does not even represent the first time Congress enacted “employee retention credits” as relief measures in response to natural disasters. Perhaps, among the most well-known examples, Hurricane Katrina and California wildfires have captured the most attention in more recent years. Undoubtedly, the ERC shares the nature of its statutory originations and legitimacy with various other employee retention credits enacted over the years.
Claiming the ERC is not a simple matter of “running the numbers;” instead, it involves a comprehensive analysis of complex legislation and IRS guidance followed by careful application to each employer’s unique facts and circumstances. This process also involves the compilation and review of various records. As clarified by the IRS, an eligible employer needs to maintain records that will adequately substantiate their ERC eligibility. For example, if an employer’s eligibility claim rests on a partial suspension, that position and substantiating records (often compiled in a “memo”) must include: (1) the relevant government order(s), and (2) a precisely tailored narrative as to how the order(s) directly impacted the business. Similarly, if an employer’s eligibility claim rests upon a gross receipts’ analysis, the eligibility memo must provide the computations used for each quarter under consideration. Any eligibility memo falling short of this standard is unacceptable.
Significantly, claiming the ERC is analogous to claiming a deduction on one’s income tax return in that the taxpayer must sign off on the return under penalty of perjury. When an employer entrusts a preparer to act as a competent professional, the employer fully expects to be able to rely on the professional’s ERC analysis. Again, experienced and trustworthy preparers who sign off on returns are cognizant of the high standard of conduct they are held to and the penalties for a violation of those standards. Indeed, one of the biggest red flags in the ERC context is a preparer who refuses to sign the IRS Form 941-X used to claim the credit.
We fully expect the IRS to continue issuing warnings about ERC scams and those unscrupulous actors involved. And audits and criminal investigations are active and ongoing. Indeed, the IRS Commissioner, Danny Werfel, emphasized in the 2023 Dirty Dozen news release that:
Businesses need to think twice before filing a claim for these credits. While the credit has provided a financial lifeline to millions of businesses, there are promoters misleading people and businesses into thinking they can claim these credits. There are very specific guidelines around these pandemic-era credits; they are not available to just anyone. People should remember the IRS is actively auditing and conducting criminal investigations related to these false claims. We urge honest taxpayers not to be caught up in these schemes.
Equally true in that same news release is Werfel’s statement that “[Businesses] should listen to the advice of their trusted tax professional.” As the IRS states later in the new release:
When properly claimed, the ERC is a refundable tax credit designed for businesses that continued paying employees while shut down due to the COVID-19 pandemic or that had a significant decline in gross receipts during the eligibility periods. The credit is not available to individuals.
Our team at Frost Law has a sophisticated process in place which helps businesses get the maximum accurate amount of ERC, as quickly and smoothly as possible. We are a dedicated team of tax attorneys and other tax professionals who work hard so that you can remained focused on running your business—knowing that you are optimizing your relief potential while minimizing your audit risk. Call us today at (410) 497-5947 or you can schedule a confidential consultation.