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Issue Number:? ? IR-2024-85

Inside This Issue

Dirty Dozen: Beware of aggressive promoters who dupe taxpayers into making questionable Employee Retention Credit claims; risks continue for small businesses, special withdrawal program remains available

WASHINGTON ? As part of this year?s Dirty Dozen, the Internal Revenue Service continues to warn businesses and others to stay clear of unscrupulous and aggressive promoters of questionable claims for the Employee Retention Credit (ERC).

These questionable ERC claims often put unsuspecting businesses and other entities in jeopardy of penalties, interest and potentially even criminal prosecution for claiming the ERC when they don?t qualify and aren?t entitled to it.

In day two of the Dirty Dozen series, this latest warning comes as the IRS continues to take special steps to counter aggressive marketing around the ERC, sometimes referred to as the Employee Retention Tax Credit or ERTC. Since the IRS announced a moratorium on processing new claims filed after Sept. 14, 2023, the agency?s compliance efforts on ERC claims have topped more than $1 billion so far since last fall as work continues on a number of efforts to counter questionable claims.

With compliance work on ERC claims continuing to expand through both audits and criminal investigations, the IRS reminded businesses they still have an option to pull back on any unprocessed claims. Businesses should quickly pursue the claim withdrawal process if they need to ask the IRS not to process an ERC claim for any tax period that hasn?t been paid yet.

While this work continues, the IRS continues to urge businesses to carefully review the complex ERC guidelines before submitting a claim. The IRS remains concerned that some ineligible businesses are being encouraged by marketers to submit an incorrect ERC claim; people should contact a trusted tax professional first to avoid potential IRS compliance action in the future.

?We remain concerned that unscrupulous promoters and numerous myths about eligibility for this credit could put well-meaning businesses at risk,? said IRS Commissioner Danny Werfel. ?Before anyone files an Employee Retention Credit claim, they should carefully review the eligibility guidelines and talk to a trusted tax professional. Relying on a marketer who is looking to take a hefty percentage fee of the potential claim adds risk for well-meaning businesses given the ongoing IRS compliance work.?

The IRS took significant compliance steps regarding the ERC program after the well-intentioned pandemic-era program came under aggressive, misleading marketing that oversimplified or misrepresented eligibility rules. Promoters pushed more applicants into the program, frequently by taking a percentage of the payout.

When properly claimed, the ERC is a refundable tax credit designed for businesses that continued paying employees during the COVID-19 pandemic while their business operations were either fully or partially suspended due to a government order, or had a decline or significant decline in gross receipts during the eligibility periods.

Started in 2002, the IRS' annual Dirty Dozen campaign lists 12 scams and schemes that put taxpayers, businesses and the tax professional community at risk of losing money, personal information, data and more. While the Dirty Dozen is not a legal document or a formal listing of agency enforcement priorities, the education effort is designed to raise awareness and protect taxpayers and tax pros from common tax scams and schemes.

ERC withdrawal program
The IRS is also continuing to accept and process requests to withdraw an employer?s full ERC claim under a special withdrawal process. The IRS has already received more than $250 million in withdrawals as the agency continues intensifying audits and criminal investigation work in this area.

This withdrawal option allows certain employers that filed an ERC claim but have not yet received a refund to withdraw their submission and avoid future repayment, interest and penalties. Employers that submitted an ERC claim that have not yet been paid can withdraw their claim and avoid the possibility of getting a refund for which they're ineligible. They can also withdraw their claim if they?ve received a check but have not yet deposited or cashed it.

The IRS created the withdrawal option to help small business owners and others who were pressured or misled by ERC marketers or promoters into filing ineligible claims. Claims that are withdrawn will be treated as if they were never filed. The IRS will not impose penalties or interest.

The IRS continues to encourage employers who submitted claims to review the ERC requirements and talk to a trusted tax professional about their eligibility amid misleading marketing around the credit.

For more information on ERC eligibility, taxpayers can see the ERC frequently asked questions and the ERC Eligibility Checklist, which is available as an interactive tool or as a printable guide.

Signs an ERC claim could be incorrect
Recently, the IRS highlighted special warning signs that an ERC claim may be questionable to help small businesses that may need to resolve incorrect claims.

The agency shared suspicious warning signs that could signal future IRS problems involving ERC claims. Built on feedback from the tax professional community and IRS compliance personnel, the warning signs center on misinformation some unscrupulous ERC promoters used.

Here are common red flags IRS is seeing on ERC claims:

• Too many quarters being claimed. Some promoters have urged employers to claim the ERC for all quarters that the credit was available. Qualifying for all quarters is uncommon and this could be a sign of an incorrect claim.
• Government orders that don?t qualify. Some promoters have falsely told employers they can claim the ERC if any government order was in place in their area, even if their operations weren?t affected or if they chose to suspend their business operations voluntarily.
• Too many employees and wrong calculations. Employers should be cautious about claiming the ERC for all wages paid to every employee on their payroll. The law changed throughout 2020 and 2021. There are dollar limits and varying credit amounts, and employers need to meet certain rules for wages to be considered qualified wages, depending on the tax period.
• Business citing supply chain issues. Qualifying for the ERC based on a supply chain disruption is very uncommon. A supply chain disruption by itself doesn?t qualify an employer for the ERC.
• Business claiming the ERC for too much of a tax period. It's uncommon for an employer to qualify for the ERC for the entire calendar quarter if their business operations were fully or partially suspended due to a government order during a portion of a calendar quarter.
• Business didn?t pay wages or didn?t exist during eligibility period. Employers can only claim the ERC for tax periods when they paid wages to employees.
• Promoter says there?s nothing to lose. Businesses should be on high alert with any ERC promoter who urged them to claim the ERC because they ?have nothing to lose.? Businesses that incorrectly claim the ERC risk repayment requirements, penalties, interest, audit and potential expenses of hiring someone to help resolve the incorrect claim.

Help for businesses that may have been misled on the ERC
Some promoters told taxpayers every employer qualifies for the ERC. The IRS and the tax professional community emphasize that this is not true. Eligibility depends on specific facts and circumstances. The IRS has dozens of resources to help people learn about and check ERC eligibility, and businesses can also consult their trusted tax professional. Key IRS materials include:

• ERC Eligibility Checklist (interactive version and a printable guide) includes cautions about common areas of misinformation and links to facts and examples.
• 7 warning signs ERC claims may be incorrect outlines tactics that unscrupulous promoters have used and why their points are wrong.
• Frequently asked questions about the Employee Retention Credit includes eligibility rules, definitions, examples and more.

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