Frost Law
The IRS is increasingly committed to scrutinizing and thwarting activities involving promoters of abusive tax schemes. In 2021, the IRS created the Office of Promoter Investigations, which is charged with creating and delivering “major activities that support IRS efforts to detect and deter abusive tax promotions1 and abusive return preparers, including those who enable abusive tax promotions.” Undoubtedly, promoters of abusive employee retention credit (ERC) claims threaten our tax system’s integrity and exacerbate the tax gap. As a direct result of their involvement in, or marketing of, abusive ERC claims, such promoters risk facing: (1) civil investigations, subject to steep penalties and injunctive action, and (2) criminal investigations.
While it may be obvious to most people that the IRS can go after tax preparers that ultimately file fraudulent or erroneous ERC claims, it may not be as abundantly clear that the IRS can go after promoters who may never have touched a Form 941-X. However, the IRS is poised to aggressively pursue ERC promoters, and the net the IRS is casting is wider than you might suspect. So, what counts as a “promoter?”
Generally, a promoter is understood to be an individual or company that promotes abusive transactions to clients. As the United States Government Accountability Office explains:
The term “promoter” generally means a person who (1) organizes an entity, investment plan or arrangement, or any other plan or arrangement, or participates, directly or indirectly, in the sale of any interest in an entity, plan, or arrangement and (2) makes, furnishes, or causes another person to make or furnish a statement about its tax benefits. When the promoter knows or has reason to know the statement is false or fraudulent to any material matter or a gross valuation overstatement to any material matter, a penalty can be imposed. See 26 U.S.C. §6700(a).2
With that definition in mind, it’s easy to envision how ERC promoters can be third-party participants (i.e., neither the taxpayer nor the return preparer) in ERC schemes. Remember, the definition above clarifies that a promoter may be a person who “participates, directly or indirectly.” Some examples of actors that can be promoters, include:
Note that in the firms like those listed above, both owners and employees risk falling under the reach of Internal Revenue Code (IRC) §6700, depending on the IRS’s ability to prove that the person knew, or had reason to know, that the statements they made were false or fraudulent as to a material matter.3
Example: ERC4U and its employees are employing aggressive marketing tactics to promote an ERC scheme that promises substantial tax savings for employers. These marketing efforts involve highlighting the ERC as a “quick and foolproof” method for reducing tax liabilities. They utilize promotional materials that contain exaggerated claims regarding the ERC's benefits, misrepresent the eligibility criteria, and overstate the potential tax savings. Businesses that are enticed to respond to ERC4U’s communications are directed by ERC4U to a company that will be responsible for preparing the return(s). ERC4U and its employees all risk being promoters subject to severe civil and criminal penalties if their promotions resulted in fraudulent or erroneous tax returns being filed.
Typically, promoters, including ERC promoters, “hunt” for their victims and market a position that sounds too good to be true. ERC promoters utilize all conceivable methods and platforms of communication in their attempts to attract taxpayers with their siren song, promising eligibility and lucrative results. Businesses report having their inboxes overwhelmed by ERC promoters’ marketing efforts. Many of them look and sound the part as they “help” businesses evaluate their eligibility for and/or claim the credit. They may, or may not, prepare the returns. In exchange, their targets usually pay them a hefty contingency fee, calculated as a percentage of the refund obtained.
The IRS has issued multiple warnings about such promoters, listing warning signs to watch out for such as:
While the full extent of sanctions that promoters (who are not tax preparers) might face remains somewhat uncertain, the IRC §§6700 and 6701 penalties are applied to a broad spectrum of promoters. Depending on the facts and circumstances, ERC promoters may find themselves penalized for promoting abusive tax shelters or aiding and abetting. We briefly survey each of these penalties below.
IRC §6700 imposes a penalty on persons who promote abusive tax shelters. In more technical terms, this civil penalty is imposed on any person (a “promoter”) who:
It’s important to emphasize that, per IRC §6700, a tax shelter may present as any entity, plan, or arrangement from which a tax benefit may be derived. Note that a tax benefit may include a credit, a deduction, an increase in basis, and more.6
Another point to keep in mind is that this penalty won’t be assessed unless a determination is made that the promoter knew or had reason to know that the statements the promoter made were false or fraudulent; however, proof of actual knowledge is not required. The IRS is authorized to rely on objective evidence of the promoter’s knowledge of the transaction.7
The penalty amount depends on whether there was a false statement or a gross valuation overstatement. The penalty for a false or fraudulent statement equals 50% of the gross income derived (or to be derived) from the activity by the person on which the penalty is imposed.8 Whereas, for gross valuation overstatements, the penalty amount with respect to each activity is $1,000 or, if the promoter can demonstrate a lesser amount, an amount equal to 100% of the gross income derived (or to be derived) by the promoter.9 If the promoter will derive an amount which is contingent or speculative, the formula is based on amounts that the promoter can reasonably be expected to realize.10
Another civil penalty that ERC promoters may face is found in IRC §6701—the “aiding and abetting penalty.” This penalty is not limited to tax return preparers.11 However, if this penalty is imposed, it precludes the imposition of either IRC §6694 or IRC §6700 penalties.12
Under IRC §6701, a penalty of $1,000 ($10,000 if the offense relates to a corporation’s returns or documents) is imposed on any person who:
Although the penalty is applied broadly, a person who only supplies mechanical assistance (like typing, reproduction, etc.) in document preparation is not subject to the penalty.13
This civil penalty is only applied against promoters who were also the preparers of the fraudulent or erroneous tax returns. A preparer can face penalties under this section if they:
For a position not to be held unreasonable, the preparer must have based their position on substantial authority. If the transaction relates to a tax shelter or other reportable transaction, then the position is unreasonable unless it was reasonable to believe that the position would be sustained on the merits to a standard of more likely than not. If the preparer had a reasonable basis in their position, they could avoid any penalty, not related to tax shelters, by disclosing their position when the return was filed. Preparers found to violate this section face a penalty of “the greater of $1,000 or 50% of the income derived (or to be derived) by the tax return preparer with respect to the return of claim.”15
Promoter and tax preparer investigations, whether conducted in civil or criminal contexts, typically begin as civil inquiries. In cases of significant misconduct committed on a substantial scale, the IRS may escalate the matter to the Department of Justice (DOJ) for criminal consideration. This involves a comprehensive assessment to determine whether criminal charges are warranted, and if so, the DOJ may proceed with legal action.
In the context of promoters, the U.S. government possesses the authority to take legal action in federal district court to halt an individual's unlawful conduct related to tax shelters and reportable transactions. This encompasses violations of Circular 230, and other pertinent laws governing the practice before the IRS.
Within the spectrum of statutes that can have direct implications for promoters, the IRS has already indicated that “from a criminal perspective, we are also looking at promoters in terms of criminal charges and those could include:” 16
The era where promoters believed they were immune from charges simply because they were not directly involved in preparing and filing ERC returns has drawn to a close. The IRS has adopted a proactive approach to tackle the promotion of fraudulent or unsubstantiated claims associated with the ERC. It is now clear that the regulatory landscape for third-party promoters engaged in unlawful ERC tax schemes comprises an array of both civil and criminal penalties. The IRS has deployed a range of tools designed to serve as a strong deterrent, leaving little room for promoters to engage in these schemes without facing consequences.
These promoters have, unfortunately, taken advantage of many employers trying to do the right thing. Individuals who feel as if they have been taken advantage of by promoters and those who are currently facing audits of their ERC claims should contact a trusted tax professional to have their individual situations examined.
EXECUTIVE SUMMARY
The IRS is increasingly committed to scrutinizing and thwarting activities involving promoters of abusive tax schemes. In 2021, the IRS created the Office of Promoter Investigations, which is charged with creating and delivering “major activities that support IRS efforts to detect and deter abusive tax promotions1 and abusive return preparers, including those who enable abusive tax promotions.” Undoubtedly, promoters of abusive employee retention credit (ERC) claims threaten our tax system’s integrity and exacerbate the tax gap. As a direct result of their involvement in, or marketing of, abusive ERC claims, such promoters risk facing: (1) civil investigations, subject to steep penalties and injunctive action, and (2) criminal investigations.
While it may be obvious to most people that the IRS can go after tax preparers that ultimately file fraudulent or erroneous ERC claims, it may not be as abundantly clear that the IRS can go after promoters who may never have touched a Form 941-X. However, the IRS is poised to aggressively pursue ERC promoters, and the net the IRS is casting is wider than you might suspect. So, what counts as a “promoter?”
Generally, a promoter is understood to be an individual or company that promotes abusive transactions to clients. As the United States Government Accountability Office explains:
The term “promoter” generally means a person who (1) organizes an entity, investment plan or arrangement, or any other plan or arrangement, or participates, directly or indirectly, in the sale of any interest in an entity, plan, or arrangement and (2) makes, furnishes, or causes another person to make or furnish a statement about its tax benefits. When the promoter knows or has reason to know the statement is false or fraudulent to any material matter or a gross valuation overstatement to any material matter, a penalty can be imposed. See 26 U.S.C. §6700(a).2
With that definition in mind, it’s easy to envision how ERC promoters can be third-party participants (i.e., neither the taxpayer nor the return preparer) in ERC schemes. Remember, the definition above clarifies that a promoter may be a person who “participates, directly or indirectly.” Some examples of actors that can be promoters, include:
Note that in the firms like those listed above, both owners and employees risk falling under the reach of Internal Revenue Code (IRC) §6700, depending on the IRS’s ability to prove that the person knew, or had reason to know, that the statements they made were false or fraudulent as to a material matter.3
Example: ERC4U and its employees are employing aggressive marketing tactics to promote an ERC scheme that promises substantial tax savings for employers. These marketing efforts involve highlighting the ERC as a “quick and foolproof” method for reducing tax liabilities. They utilize promotional materials that contain exaggerated claims regarding the ERC's benefits, misrepresent the eligibility criteria, and overstate the potential tax savings. Businesses that are enticed to respond to ERC4U’s communications are directed by ERC4U to a company that will be responsible for preparing the return(s). ERC4U and its employees all risk being promoters subject to severe civil and criminal penalties if their promotions resulted in fraudulent or erroneous tax returns being filed.
Typically, promoters, including ERC promoters, “hunt” for their victims and market a position that sounds too good to be true. ERC promoters utilize all conceivable methods and platforms of communication in their attempts to attract taxpayers with their siren song, promising eligibility and lucrative results. Businesses report having their inboxes overwhelmed by ERC promoters’ marketing efforts. Many of them look and sound the part as they “help” businesses evaluate their eligibility for and/or claim the credit. They may, or may not, prepare the returns. In exchange, their targets usually pay them a hefty contingency fee, calculated as a percentage of the refund obtained.
The IRS has issued multiple warnings about such promoters, listing warning signs to watch out for such as:
While the full extent of sanctions that promoters (who are not tax preparers) might face remains somewhat uncertain, the IRC §§6700 and 6701 penalties are applied to a broad spectrum of promoters. Depending on the facts and circumstances, ERC promoters may find themselves penalized for promoting abusive tax shelters or aiding and abetting. We briefly survey each of these penalties below.
IRC §6700 imposes a penalty on persons who promote abusive tax shelters. In more technical terms, this civil penalty is imposed on any person (a “promoter”) who:
It’s important to emphasize that, per IRC §6700, a tax shelter may present as any entity, plan, or arrangement from which a tax benefit may be derived. Note that a tax benefit may include a credit, a deduction, an increase in basis, and more.6
Another point to keep in mind is that this penalty won’t be assessed unless a determination is made that the promoter knew or had reason to know that the statements the promoter made were false or fraudulent; however, proof of actual knowledge is not required. The IRS is authorized to rely on objective evidence of the promoter’s knowledge of the transaction.7
The penalty amount depends on whether there was a false statement or a gross valuation overstatement. The penalty for a false or fraudulent statement equals 50% of the gross income derived (or to be derived) from the activity by the person on which the penalty is imposed.8 Whereas, for gross valuation overstatements, the penalty amount with respect to each activity is $1,000 or, if the promoter can demonstrate a lesser amount, an amount equal to 100% of the gross income derived (or to be derived) by the promoter.9 If the promoter will derive an amount which is contingent or speculative, the formula is based on amounts that the promoter can reasonably be expected to realize.10
Another civil penalty that ERC promoters may face is found in IRC §6701—the “aiding and abetting penalty.” This penalty is not limited to tax return preparers.11 However, if this penalty is imposed, it precludes the imposition of either IRC §6694 or IRC §6700 penalties.12
Under IRC §6701, a penalty of $1,000 ($10,000 if the offense relates to a corporation’s returns or documents) is imposed on any person who:
Although the penalty is applied broadly, a person who only supplies mechanical assistance (like typing, reproduction, etc.) in document preparation is not subject to the penalty.13
This civil penalty is only applied against promoters who were also the preparers of the fraudulent or erroneous tax returns. A preparer can face penalties under this section if they:
For a position not to be held unreasonable, the preparer must have based their position on substantial authority. If the transaction relates to a tax shelter or other reportable transaction, then the position is unreasonable unless it was reasonable to believe that the position would be sustained on the merits to a standard of more likely than not. If the preparer had a reasonable basis in their position, they could avoid any penalty, not related to tax shelters, by disclosing their position when the return was filed. Preparers found to violate this section face a penalty of “the greater of $1,000 or 50% of the income derived (or to be derived) by the tax return preparer with respect to the return of claim.”15
Promoter and tax preparer investigations, whether conducted in civil or criminal contexts, typically begin as civil inquiries. In cases of significant misconduct committed on a substantial scale, the IRS may escalate the matter to the Department of Justice (DOJ) for criminal consideration. This involves a comprehensive assessment to determine whether criminal charges are warranted, and if so, the DOJ may proceed with legal action.
In the context of promoters, the U.S. government possesses the authority to take legal action in federal district court to halt an individual's unlawful conduct related to tax shelters and reportable transactions. This encompasses violations of Circular 230, and other pertinent laws governing the practice before the IRS.
Within the spectrum of statutes that can have direct implications for promoters, the IRS has already indicated that “from a criminal perspective, we are also looking at promoters in terms of criminal charges and those could include:” 16
The era where promoters believed they were immune from charges simply because they were not directly involved in preparing and filing ERC returns has drawn to a close. The IRS has adopted a proactive approach to tackle the promotion of fraudulent or unsubstantiated claims associated with the ERC. It is now clear that the regulatory landscape for third-party promoters engaged in unlawful ERC tax schemes comprises an array of both civil and criminal penalties. The IRS has deployed a range of tools designed to serve as a strong deterrent, leaving little room for promoters to engage in these schemes without facing consequences.
These promoters have, unfortunately, taken advantage of many employers trying to do the right thing. Individuals who feel as if they have been taken advantage of by promoters and those who are currently facing audits of their ERC claims should contact a trusted tax professional to have their individual situations examined.
